Monetary policy during the global financial crisis of 2007-2009 : the case of Peru

In terms of the implications for emerging market economies, the recent global financial crisis has had two main stages. The first stage, between the last quarter of 2007 and the collapse of Lehman Brothers, was characterised by important capital inflows and the second, postLehman, stage was associated with a rapid and severe deterioration of external conditions. The management of the crisis by emerging market central banks required, in both stages, a combination of conventional and unconventional monetary policy measures due to the need to preserve the monetary policy transmission mechanism. It is interesting to note that in several countries, including Peru, the sequence of monetary policy adoption began with the set of unconventional measures due to the weakening of the interest rate channel during the high uncertainty period in the last quarter of 2008. The combination and sequence of monetary policies showed the importance of keeping a high level of liquidity at three levels: international reserves at the central bank, liquidity of financial intermediaries and an adequate position of public debt in terms of its average maturity and currency composition. A comfortable level of liquidity allows the central bank to credibly provide sufficient funds in domestic and foreign currency so as to ensure a credit flow during the crisis. A high level of international reserves also allows the central bank to intervene in the foreign exchange (FX) market to prevent panic or excessive volatility that could lead to a financial crisis and, thus, to a recession