Central Bank Functions and the Unconventional Operations and Their Effectiveness During the Financial Crisis in 2007-2012 - a Literature Review

Abstract

The objective of this thesis has been to find out the unconventional operations by the Federal Reserve Bank, the European Central Bank and the Bank of England during the financial crisis in 2007-2012 and the effectiveness of these operations. Other related topics have been the reasons behind the crisis, the need for the unconventional operations and why there have been some differences between the unconventional operations among the central banks.

Research method has been literature review. The material used consists of a comprehensive set of economic literature.

During the early stages of the financial crisis the central banks made relatively modest adjustments to their conventional operations. The main object was to provide necessary liquidity to the banks. After the collapse of Lehman Brothers the interbank lending became severely impaired and the central banks turned their focuses on narrowing key interest rate spreads. When the central banks lowered their key interest rates to floor level they started to expand their balance sheets through asset purchases. While the unconventional operations helped in avoiding a complete meltdown of the financial sector their effectiveness is not completely clear and further research about transmission mechanism from monetary policy to asset prices and expectations is much needed.