ben s bernanke : emerging from the crisis – where do we stand? speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the 6th ecb central banking conference, frankfurt am main, 19 november 2010. * * * the last time i was here at the european central bank ( ecb ), almost exactly two years ago, i sat on a distinguished panel much like this one to help mark the 10th anniversary of the euro. even as we celebrated the remarkable achievements of the founders of the common currency, however, the global economy stood near the precipice. financial markets were volatile and illiquid, and the viability of some of the world ’ s leading financial institutions had been called into question. with asset prices falling and the flow of credit to the nonfinancial sector constricted, most of the world ’ s economies had entered what would prove to be a sharp and protracted economic downturn. by the time of that meeting, the world ’ s central banks had already taken significant steps to stabilize financial markets and to mitigate the worst effects of the recession, and they would go on to do much more. very broadly, the responses of central banks to the crisis fell into two classes. first, central banks undertook a range of initiatives to restore normal functioning to financial markets and to strengthen the banking system. they expanded existing lending facilities and created new facilities to provide liquidity to the financial sector. key examples include the ecb ’ s one - year long - term refinancing operations, the federal reserve ’ s auctions of discount window credit ( via the term auction facility ), and the bank of japan ’ s more recent extension of its liquidity supply operations. to help satisfy banks ’ funding needs in multiple currencies, central banks established liquidity swap lines that allowed them to draw each other ’ s currencies and lend those funds to financial institutions in their jurisdictions ; the federal reserve ultimately established swap lines with 14 other central banks. central banks also worked to stabilize financial markets that were important conduits of credit to the nonfinancial sector. for example, the federal reserve launched facilities to help stabilize the commercial paper market and the market for asset - backed securities, through which flow much of the funding for student, auto, credit card, and small business loans as well as for commercial mortgages. in addition, the federal reserve, the ecb, the bank of

over to foreign economies by causing their interest rates to fall – though typically by less than in the united states – and their currencies to appreciate against the dollar. at the same time, international capital flows tend to shift toward foreign economies in response to their relatively more attractive interest rates. the pass - through of changes in u. s. policy rates abroad depends importantly on how foreign monetary authorities respond. a decline in u. s. policy rates has a relatively large effect on foreign policy rates in economies that opt to limit exchange rate fluctuations, at least for economies with reasonably open capital accounts. by contrast, a central bank in an economy with a freely floating exchange rate might choose to lower its interest rate by a much smaller amount than in the united states if it believes that domestic conditions so warrant. in this case, the country ’ s exchange rate would appreciate as investors rebalance their portfolios in favor of assets denominated in its currency in response to the higher interest rate differential. 5 there is also evidence that monetary policy actions can influence investors ’ willingness to hold risky assets, the so - called risk - taking channel. 6 such effects seem to be most potent when financial conditions are stressed. and countries that offer high prospective returns but have weak policy frameworks or other structural vulnerabilities may be particularly sensitive to fluctuations in international investment associated with global risk factors. 7 for a discussion of the effect of federal reserve actions on international economic conditions, see rey ( 2015 ). see hume ( 1742 ). see mundell ( 1963 ) and fleming ( 1962 ). one key implication of the mundell - fleming framework is that a central bank can exercise full control over both the exchange rate and the domestic interest rate only when there are significant barriers to the international capital mobility. accordingly, policymakers face the constraint of the “ impossible trinity, ” which states that a country cannot simultaneously have an independent monetary policy, free capital movement, and a fixed exchange rate. several recent papers discuss risk - taking channels through which monetary policy influences financial conditions more broadly than the level of safe interest rates. see borio and zhu ( 2012 ), rey ( 2015 ), morris and shin ( 2014 ), bruno and shin ( 2015 ), and the hanson and stein ( 2015 ) “ reaching for yield ” concept. studies using panel data typically have found that country - specific factors help explain cross - sectional differences in international investment and capital flows. see, for example, furceri, guichard,