A decade ago, we got the first warnings that the US subprime crisis would go global. Since then, monetary policy has pushed deep into unconventional territory. How will it respond as the backdrop begins to look more “normal”?

On August 9, 2007, the European Central Bank (ECB) made a massive €95 billion overnight liquidity injection into the euro-area banking system in response to problems at French bank BNP Paribas. Although some tremors had preceded this move, it was the first indication that the US subprime crisis was taking on a global dimension. It was also the first significant central bank intervention in what would soon become the global financial crisis (GFC).

In the subsequent 10 years, much of our understanding of the way economies work has been turned on its head. The global economy experienced its worst recession since the 1930s and we learned that not all institutions are “too big to fail.” Central banks, meanwhile, inflated their balance sheets to levels normally seen only during wartime and pushed interest rates into negative territory. All of this was unimaginable a decade ago.

A BROADER RESEARCH SCOPE NEEDED

We’ve learned some important lessons over this period—and our research reflects them. We’ve broadened our approach away from a narrow focus on business-cycle developments. Instead, we think a more balanced approach is necessary, one which also considers the financial cycle and structural factors likely to influence economies and asset prices over longer horizons. In short, the GFC has changed the way we look at the world.

Yet, just as it was wrong to downplay the importance of the financial cycle and structural factors 10 years ago, it’s important not to ignore the business cycle today.

So how does the world look 10 years on? Based on our estimates, the global economy grew at an annual rate of 3.0% in the first quarter this year, roughly 1% below the pace of the immediate precrisis period. But the latter was achieved at the peak of a debt-fueled asset-price boom. In the quarter century prior to the crisis, by contrast, the global economy grew at 3.0% per annum—in line with its current growth rate (Display).

We can make similar observations about other indicators. In developed economies, for example, the unemployment rate is close to cyclical lows reached in 2007, the money supply is rising nicely and so are asset prices (too nicely for some!). In many respects, therefore, the global economy is starting to look a bit more “normal.”