"Another benefit would have been to ameliorate currency crises in emerging markets and smaller countries"

A very interesting post on Vox by John N Muellbauer:

The current financial crisis will probably lead to a deep recession. This column suggests that European central banks, misguided by outdated econometric models, should have cut rates faster and deeper in a coordinated fashion. They should now scrap these models and agree on a large, coordinated cut of 2 percentage points.

When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

• The failure to keep Lehman Bros functioning as a going concern.
• The failure of the ECB and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the 8 October 2008 cut was too timid).

Read the post. On smaller countries, note this:

"Another benefit would have been to ameliorate currency crises in emerging markets and smaller countries such as Denmark. Their exchange rates depend in part on interest rate spreads with the major currencies. A co-ordinated global interest rate cut would have widened spreads without these countries having to raise rates to support their currencies in the face of severe recessions. Moreover, as late as October 21st, many other central banks would have felt able to join a co-ordinated cut without exposing their currencies.

More generally, the reduction in policy rates, and the prospect of more to follow, would have reduced returns on safe assets, such as government bonds, and induced investors at the margin to rebalance towards riskier assets, such as equity and corporate debt. The rise in such asset prices would eventually have helped to restore collateral values, slowing the spiral of rising bankruptcies.

Following the panic beginning on October 22nd, the task of restoring confidence is far harder. With asset prices so much lower, the bad loan position of the banking system looks worse, and with it, the potential burden on tax payers. The damage for the UK looks particularly severe, with its debt and housing market vulnerability - reflected in the sudden decline in Sterling and in Treasury gilt prices."

In other words, lower interest rates to deter people from moving money towards the big countries, in order to give them an incentive to keep money in the smaller countries.