Conditional Containment

Abstract

The financial crisis started whilst the real economy was still showing vibrant growth, and growth continued for some time after the crisis started. So did inflationary pressures, especially from commodity prices. This economic environment conditioned containment of the crisis. Unlike prior crises in 1987, 1998 and 2001 the authorities did not counter the crisis with immediate reductions in short-term interest rates. The authorities kept interest rates relatively high in order to counter incipient inflation. Containment of the crisis centred on restructuring the so-called shadow banking system, recapitalising financial institutions, resolving particular institutions, and on limiting contagion to the rest of the financial system.