The impact of the financial crisis on the performance of conventional monetary policy in the euro area.

Summary This article assesses the extent to which the 2007 financial crisis has affected the implementation of conventional monetary policy in the euro area. This question is addressed within a theoretical framework based on the New Keynesian synthesis model that prevailed before the 2007 crisis. We observe that the crisis has strongly reduced the performance of conventional policy after the deterioration of the trade-off between the variance of inflation and that of activity (as defined by the Taylor curve), and after the deterioration of its effectiveness (as measured from the deviation from the Taylor curve resulting from a strong increase in the contribution of the output gap). The interest rate values simulated by our model show that the ECB should have set interest rates lower than those observed, and negative at the end of the period. New unconventional instruments are in fact necessary in order to make up for a monetary policy practice that was focused primarily on price stability, in a calm macroeconomic environment.