“Monetary policy was lax and eventually caused inflation, but not the financial crisis itself," states Charles Wyplosz in the 11/2009 CASE Network E-Brief.  In No, the Central banks didn’t do it, Wyplosz untangles the misconception that central bank policies may be fully to blame for the onset of the financial crisis.  He argues that although lax monetary policy may have contributed, particularly to rising inflation, it was distorted market perceptions and inaccurate calculations of risk which set the stage for the crisis. 

[full text E-brief]

No, the central banks didn’t do it
By Dr. Charles Wyplosz, Professor of International Economics at The Graduate Institute in Geneva

Lately, a popular view has emerged that the global financial crisis was caused by lax monetary policy in the U.S. (and elsewhere). Although, lax monetary policy can be  attributed to the bout of inflation that preceded the crisis, it cannot be blamed for the housing price bubble and the ensuing subprime debacle.

A popular narrative of the crisis goes as follows; central banks kept interest rates too low for too long. As a result, credit expanded sharply, which explicit or closet inflation-targeting central banks failed to notice. Easily available credit created and fed a housing price bubble as households sought to fulfill the American (British,  Spanish, Irish, etc.) dream of home ownership. Abundant liquidity also led investors to create and feed generalized asset price inflation. Worse, the prospect of durably low interest rates forced investors to hunt for higher yields and take on more risks, which they themselves did not even recognize. The conclusion of this story is
straightforward: central banks should never have kept interest rates so low, they should have looked at credit expansion and other monetary aggregates and realize that their policies were far too expansionary.

Shifting Narrative

This story is widely accepted as the correct narrative of the crisis, unfortunately, it only fits the facts superficially. A milder version of this view suggests that maybe monetary policy played a secondary, even supporting role, as an aggravating factor. An alternative view holds that lax monetary policy is neither a necessary nor a sufficient condition for the crisis. Monetary policy was lax and eventually caused inflation, but not the financial crisis itself. (...)