Comparing the monetary policy responses to the crisis by the Fed and the ECB

Dae Woong Kang, Nick Ligthart and Ashoka Mody compare the responses.

In most such analyses, we find Fed did a better job than ECB. This one too says the same:

We conclude also that the Fed gained credibility even though it appeared to temporarily suspend its commitment to price stability. Bordo and Kydland (1995) have argued that setting aside a policy rule to deal with extraordinary contingency is consistent with a commitment to long-term goals. The Fed made clear its objective of preventing a meltdown and, as Blinder (2012) has emphasised, credibility principally requires that words be matched with deeds.

In the Eurozone, words were often a substitute for deeds. Markets and investors reacted to the tight monetary policy, which added to the economic drag and deflationary tendencies due to fiscal austerity and lingering banking problems. By mid-2009, Eurozone output had fallen behind that of the US, and it never caught up. Delays in stimulating economic recovery have permanent consequences, as recent analysis reaffirms (Fatas and Summers 2015). For all its rear-guard action, the ECB misread the Crisis and will be associated with the legacy of a weak recovery and more entrenched deflationary tendencies. If, as is entirely possible, the Eurozone’s core inflation rate remains below 1% a year, the ECB’s credibility will be twice hurt. Not only would it have failed to provide stimulus when needed, but it would have allowed the EZ to slip into a low inflation trap, well below its stated target of 2% a year.

A case of picking who messed up lesser than the other?

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