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Not too long ago, conventional wisdom in academic and central banking circles held that monetary policy had become increasingly effective the past quarter century. Growth had become steadier. Recessions were shorter and less frequent. Inflation rates in much of the world had converged to low and relatively stable levels. This complacent view was shattered the past two years as a global financial crisis and severe recession raised doubts about central banks' performance. To combat the crisis, the Federal Reserve put the target federal funds rate on a downward trajectory, taking it to near zero by year-end 2008. By itself, this traditional monetary policy stimulus proved insufficient to stem the output and employment declines or to reduce financial instability.
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