Abstract:

With the negative impacts of globalization and structural transformations experienced in the world economy, the financial crisis has made the conduct of monetary policy difficult, especially by creating instability in the transmission mechanism. The crisis has created impairment in the transmission mechanism and the standard tool of central banks, changes to the short-term interest rate, has become less influental while the fiscal imbalances threatens financial stability and impairs the transmission mechanism. This has forced central banks to operate not only by way of conventional measures, in particular the key interest rate at which liquidity is injected into the system, but also via unconventional measures, designed to bypass the malfunctioning that has arisen in the financial system. Faced with severe turbulence, all central banks had to take measures in real time and switch from central banking in “standard operating mode” to “risk control and crisis management” mode. In response to the crisis, ECB lowered its key interest rates in an unprecedented manner, and has also introduced a number of non-standard measures to support the transmission of its interest rate decisions to the Euro Area economy. In terms of declining production and increasing unemployment, this severe crisis has become seriously destructive for many countries. Banking sector and credit institutions in advanced economies have faced a very challenging situation. This has complicated the implementation of monetary policy. The purpose of this paper is to mention the global financial crisis and predominantly to evaluate the monetary transmission mechanism and the banking sector in Euro Area. 

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