Policy responses to the crisis

Policymakers have implemented a wide array of responses aimed at restoring confidence in large banks and repairing the financial system. Interest rates in most industrial economies were cut until they were at or near the zero lower bound. A number of central banks expanded their balance sheets massively to ease the acute tensions in financial markets. But even though governments have taken on large commitments, they continue to be unwilling or unable to fully address the impaired assets on bank balance sheets.

Traditional and unconventional central bank actions have been matched in many places by equally aggressive fiscal expansion. Clearly, different countries have different needs and capacities for increases in government spending. In any case, an assessment of the various spending programmes will have to wait until they take full effect.