coordinated monetary policy response to a financial crisis or recession (BIS 2009).<sup>3</sup> By May 2009, policy rates of the major central banks had been reduced to close to zero, except for the European Central Bank and Bank of Canada, which stopped their rate cuts well before reaching the zero-lower bound (Arteta et al. 2015). In several advanced economies, this was complemented with capital injections or emergency funding for financial institutions (U.S. Department of Treasury 2013).

Despite lower funding costs, banks globally tightened credit standards, so financial conditions faced by borrowers did not ease by nearly as much as the cuts in policy rates might indicate. To boost credit availability, major central banks subsequently broadened the scope of their policy to include quantitative easing programs—large-scale purchases of government bonds and private sector assets and credit provision—and forward guidance on monetary policy, both aimed at lowering longer-term rates (Carstens 2019). The asset purchases resulted in substantial changes in the size and composition of the balance sheets of central banks.<sup>4</sup> The Federal Reserve also coordinated swap arrangements with other major central banks to address the shortage of U.S. dollar funding among non-U.S. banks. By the end of 2008, the Federal Reserve had extended swap lines to all major central banks as well as to Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, and Sweden. Within Europe, central banks had similar swap arrangements for short-term funding in the euro and Swiss franc.

Although these policy responses addressed the immediate funding needs of banks and succeeded in averting a collapse of the financial system, the bankruptcy of Lehman Brothers in September 2008 caused serious concerns about the solvency of many systematically important financial institutions. As a result, additional measures were undertaken by governments in advanced economies to stabilize markets and institutions, including providing deposit and debt guarantees, capital injections to increase bank solvency, and asset purchases.

Against the backdrop of a decade of low inflation, improved policy frameworks, and high international reserves, EMDEs also pursued monetary policy accommodation. Three-fifths of central banks in EMDEs with floating exchange rates lowered policy rates by the first quarter of 2009 (Ha, Kose, and Ohnsorge 2019).<sup>5</sup> Some low-income countries (LICs), mostly in Sub-Saharan Africa (SSA), eased monetary policy when inflation pressures subsided amid lower energy and food prices (IMF 2010a). The monetary easing during the crisis stands in sharp contrast to, for example, the 1997-98 Asian financial crisis when many of the affected

> 3 The Bank of Japan, with a policy rate already very low, at 0.5 percent, did not ease, but expressed strong support for the coordinated policy action.

> 4 The Federal Reserve began its quantitative easing program in November 2008, the Bank of England in March 2009, and the European Central Bank in May 2009. These programs of large-scale purchases of longer-term assets were intended mainly to lower longer-term interest rates, partly through a “signaling effect” (i.e., by boosting investor confidence in these assets), and more importantly through a “portfolio balance effect” through which the asset purchases would reduce the availability of such assets to the private sector, thus raising their prices and lowering their yields.

> 5 Based on 39 EMDEs with available data on exchange rate regimes and monetary policy rates. In the early stages of the crisis, EMDEs increased policy rates to stem rising inflation as growth remained robust, whereas in advanced economies growth had weakened. EMDEs started to cut rates in late 2008 and early 2009.

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