Transcript of the Conference Call on the Release of the IMF Paper on Global Impact and Challenges of Unconventional Monetary Policies

October 7, 2013

Washington, DC
October 7, 2013

Tamim Bayoumi, Deputy Director, Strategy and Policy Review Department;
Jonathan Ostry, Deputy Director, Research Department;
Karl Habermeier, Assistant Director, Monetary and Capital Markets Department;
Tommaso Mancini, Deputy Division Chief, Monetary and Capital Markets Department; and
Olga Stankova, Senior Press Officer, Communications Department.

MS. STANKOVA: Good morning, everybody. Welcome to the conference call on the release of the paper on Global Impact and Challenges of Unconventional Monetary Policies.

Let me introduce the speakers today. Tamim Bayoumi, Deputy Director in Strategy and Policy Review Department, Jonathan Ostry, Deputy Director in the Research Department, Karl Habermeier, Assistant Director in Monetary and Capital Markets Department and Tommaso Mancini, Deputy Division Chief in Monetary and Capital Markets Department. I will now pass the microphone over to Karl, who will make brief introductory remarks and then we will take your questions.

MR. HABERMEIER: Good morning ladies and gentlemen. This is Karl Habermeier. Just a few remarks to start off with. As you may know, this is the second paper in the last six months dealing with unconventional monetary policies. The previous paper, which was published in April was dealing mainly with the domestic effects. This paper looks more at the global effects of unconventional monetary policies.

It talks also about exit from unconventional monetary policies and it deals, to some extent, with international policy coordination and the role of the IMF. The paper is divided into three sections. On the effects, I would just like to say that we confirm our results that we had in the previous paper that these policies, especially those early in the crisis to restore financial stability, were both highly necessary and highly effective and had positive effects also on the rest of the world.

We also confirmed the result that policies to support demand at the zero lower bound on policy interest rates were effective in lowering long term bond deals as well as preventing deflation and supporting economic activity. As to the effects on emerging market economies and other countries that did not use unconventional monetary policies, we find that the effects in the period that we are studying, which was through May of this year, that none of those countries suffered any serious adverse effects.

Let me turn quickly then to exit. On exit, I think the main result, the main point is that exit is not yet warranted from policies to support demand at the zero lower bound. I think also we expect that while central banks have tools and have put in place policies to manage exit as smoothly as possible, there is still a chance that there could be some turbulence in the exit process and that this could have some international spillovers. And those aspects will need to be very carefully managed in the period ahead.

And we also have emphasized in the paper the role that the IMF can play in facilitating policy dialogue and collaboration and possibly also some coordination of policies. So let me stop there.

MS. STANKOVA: Thank you, Karl. We will now take questions.

QUESTIONER: You speak a bit about how as central banks prepare to withdraw they may not have a direct effect on how the rates or the monetary policy may become less predictable because of the excess liquidity already in the system. I was wondering if you could just elaborate on that what could the Federal Reserve do differently to avoid.

MR. HABERMEIER: Well, let me step back a little bit from that and say that exit will have both what we would call a conventional and an unconventional component. The conventional component is the normalization of policy interest rates. The unconventional component has to do with the management of central banks' balance sheets.

And this very large expansion in central banks' balance sheets has had as its counterpart on central banks' liability side a very large increase in bank deposits with the central bank. And this is what we mean by excess liquidity.

Now, the way central banks typically manage excess liquidity is that they have in place some instruments such as reverse repos and deposit facilities and other instruments of that kind. And central banks have done a lot, including the Fed in the U.S., to improve the functioning of those instruments, to improve the functioning of the underlying infrastructure; and we believe that most of what is needed in that respect is by now in place.

So I think that's the key point to bear in mind.

QUESTIONER: So you think they should have no problem when they decide to pull back from --

MR. HABERMEIER: I think we would not go so far as to say that there will be no problems, because the scale of the balance sheet and the scale of the excess liquidity for the countries in question is unprecedented in size. So while I think that all the possible preparations have been put in place, we cannot guarantee that everything will function smoothly. But I think what is possible to do has already been done.

QUESTIONER: Okay, thanks.

QUESTIONER: Hi, I had roughly the same question. But I just wanted to through in the added dimension of this flattening of the Phillips curve that you all have documented and written about before. And I was just wondering whether the sort of the combined the two things, you know, the possible difficulty in making policy rates spread through the economy and also the loss of the traditional inflation unemployment tradeoff really is going to complicate post-exit policies I think for central banks both here and around the world.

I mean do we really know, I guess the question now or how uncertain is the world that these folks are going to be emerging into and have to manage? If all these old tenets are broken?

MR. BAYOUMI: Well, I think you're asking two questions. The first question you're asking is what will monetary policy look like after financial conditions have normalized.


MR. BAYOUMI: I think it's a very interesting question. It's not the really the subject of today though and we are beginning to think about this are intending to do work on this but I don't think that at this point we're at the stage where we really have strong views about that.

QUESTIONER: Well, could I just on that point since you're not writing about it yet, I'm just wondering is there anything other than the two things on the table right now? How do interest rates react and some of the underlying tenets about inflation? Are there other big kind of structural linkages that you feel have been changed, damaged, modified by the crisis and post-crisis that you're also going to have to look at?

MR. BAYOUMI: Look, I mean, obviously any crisis of this size creates a reconsideration of many things. I think that the big thing here is that prior to the crisis there was much more belief that focusing on one particular indicator such as inflation was sufficient to guide monetary policy. And I think some of the belief in that has been eroded.

Coming back to your original question, I said there were two questions involved. One was the question about how we might operate after we've normalized. The other is the process of normalization and here I think the most important thing probably to point out is we are in unconventional monetary policies. By definition there's an element of uncertainty. Most of the central banks haven't done this in living memory.

So that clearly once you've got into that kind of territory and this is the point we make in the paper, getting out of that has its own inevitable uncertainties simply because you're not somewhere where the rulebook took you. And clearly I think that some of the uncertainties that have become apparent as talk about how to taper stimulus has occurred, there's going to be inevitably some surprises because there's inevitably a lot of uncertainty.

So I think there's a basic point people have to accept and internalize that in the end if you're in a very uncertain world then sure, there are going to be surprises. That's kind of what you bought into.

QUESTIONER: Could I follow up on that just real quickly? I'm just wondering how much the, and the paper references this, how much the turbulence that followed the paper communication in May/June affected your sense of just how uncertain and how risky this upcoming period might be? I mean you had a real world example there of how communication that wasn't perfect shook things up. How did that shape the conclusions?

MR. BAYOUMI: Well, you start with something you think may happen and when to some extent part of that does happen then obviously you learn from experience. I mean, look, all of this has an element of learning by doing because as I say, we're in unconventional territory. We haven't really been here before. So clearly things would happen you learn from them.

We'd always been concerned that there could market turbulence. And so to some extent what happened was certainly not what we'd wanted, not what we'd hoped for, but it was certainly not something which was beyond the realm of what we thought about.

QUESTIONER: Yes, hello. I had a question on the exercise you did on the 13 countries. You were quite explicit about the countries that are well prepared for possible volatility following tapering. But you do not mention which countries would be having more difficulties. I know you have the appendix 1 but it doesn't draw clear conclusions. So could you be more specific and can you just let me know who answers this question because I don't hear you very well.

MR. HABERMEIER: Okay, so this is Karl Habermeier again. Let me just answer it as follows, which is that what we have to say on this we have written in the paper and it's contained in the case studies which are in the background paper. So I think you need to look at those and read them very carefully to get your answer to these questions.

I want to stress that the answers to those questions are very closely aligned with the Fund's bilateral surveillance on these countries. And so, I don't want to really elaborate on this issue much more but I think you will find the answers through close reading of the background information.

QUESTIONER: The problem is that it leaves a lot of room for personal interpretation. You're not as clear as you are for the countries that are actually doing well.

MR. HABERMEIER: Well, I think we have to recognize that there is considerable uncertainty with respect to a number of countries and how well they will fare and when you say that it's not clear that reflects the lack of certainty, which applies not only to the UMP countries but to the other countries as well, and this is reflected in what we have written. So I think it's simply inevitable.

QUESTIONER: Hi, good morning, everybody. I had a question in line with what Sandrine just asked. But for example, you say that Australia, Canada and Korea are in good shape. For example, may I conclude that Brazil is in worse shape than China but in better shape than India and Indonesia, for example?

MR. HABERMEIER: Again, Karl Habermeier. I just want to say as I said to the previous question; we don't want to get into those kinds of comparisons across countries or rankings. I think these are issues which are surrounded by a lot of uncertainty and I think it would be unfair and inappropriate for us to try to make those kinds of comparisons. So I'll leave it at that.

QUESTIONER: Okay. Just a quick follow up. You mentioned about Brazil debt you expect the post-war fiscal policy to be broadly neutral excluding policy landing. Policy landing here is a reference to allowance from the treasury from state banks, public banks?

MR. BAYOUMI: Tam Bayoumi here. Yes, the reference is to loans from government controlled banks. Yes.

QUESTIONER: Okay, thank you very much.

QUESTIONER: Good morning. Thanks very much for having the call. Can you talk a little bit about coordination? You have a section on that in the paper which is rather long on the reasons why it might make sense and then points out that it's probably going to be very hard to achieve. But I do notice embedded in there is the idea that setting up foreign exchange swap lines between central banks could be a good idea.

And of course, this has been a thought that's been flowing around among the bricks. So if you could talk about a little bit that would be good.

MR. OSTRY: Hi, thanks for your question. This is Jonathan Ostry. You know, one of the things that we wanted to stress in the paper is that coordination seems to occur spontaneously in times of crisis and we saw that with the fiscal stimulus at the outset of this crisis. But in more quiet times it doesn't seem to occur with tremendous regularity. And to ask a bit what the underlying reasons might be and a couple of them that are alluded to are the inevitable tradeoffs in domestic policymaking as well as uncertainties and disagreement about the domestic and cross-border effects of policies.

So while there could be considerable gains from coordination, we are under no illusion about the possible roadblocks and about whether it's going to easy to reap those gains in practice.

Now, the point about the swap lines, we don't really consider these be an example of coordination per se. It's more an example of when there are adverse spillovers, when there are cross border spillovers across countries, swap lines may help to ease the impact and protect countries from the more untoward effects of different policies. So we see swap lines not as an explicit example of coordination but as a way to deal with the different spillovers that seem to be salient.

QUESTIONER: But would you in general recommend countries explore opportunities to set up swap lines? And I have a follow up question as well.

MR. OSTRY: I think what the paper says on swap lines is that they could be an important avenue that would help deal with the outward spillovers. It doesn't really go beyond that to set an agenda for further work on this. But it does point out that they may have played a role in the past and they could very well play a role in the future.

QUESTIONER: One final point on this issue of advance coordination among central banks. Central bankers, when they talk about this, are happy to point out that the leading edge of transmission channel that this is going to take place is going to be through the currency. And the currency is not something that generally, certainly not in the United States, is in their -- they don't set currency policy. I mean, if you're going to coordinate there has to be some sort of an agreement on what you're going to do on exchange rates.

The IMF clearly have a central role in its surveillance, or what have you, on that but in terms of ranking the obstacles to get into a world where there is better coordination would you place the currency issue at the top of the list of obstacles?

MR. OSTRY: What I would say about that is that it's not a recipe for reaping the benefits of coordination to focus on a single objective, be it the currency, interest rates, growth, financial stability. The essence of coordination is looking at multiple objectives of policy in a country and then in partner countries and to examine the potential for policy trades. So that each country respecting its own domestic mandates and the national welfare of its own citizens can sort of trade across the different elements of the agenda-- so that all parties can be better off.

So I would say currencies are undoubtedly an important element especially when they overshoot their multilaterally warranted levels. But focusing on one objective is not a way to actually reap the benefits from coordination.

QUESTIONER: Thanks very much.

QUESTIONER: Oh, hi. Just in the same sort of coordination vein, I was wondering whether the Fund has any kind of standing agreement with the Fed to get advanced notice when they do decide to taper? I mean will they give you a head's up or will you read about it on Bloomberg when it breaks?

MR. OSTRY: I don't think anyone in this room at present has a good answer to your question. So we'll pass.

QUESTIONER: What about the MD's office?

MR. BAYOUMI: Unfortunately they're not here.

MS. STANKOVA: There will be other opportunities in the coming days to discuss this.

QUESTIONER: But I mean in the past has there been coordination on the -- I mean cause this will potentially shake the world when it happens.

MR. BAYOUMI: I think what we've emphasized is the importance of coherent policies and communication, not necessarily telling people everything that we're going to do.

QUESTIONER: Going through the report it seems to me that you shy away from mentioning country names that are especially vulnerable to a withdrawal of quantitative easing in the United States. And I’m just wondering if you could give us more details which countries you see as especially -- where do you have the most concerns for which countries?

MR. HABERMEIER: This is Karl Habermeier again. Let me answer as I did before which is that we don't want to go beyond what is written in the report. I think it's quite clear if you read attentively the case studies which countries face the greater vulnerabilities and which don't. But I think this issue we don’t want to elaborate on in this context any further than what is written already.

QUESTIONER: Okay, thanks.

QUESTIONER: How could countries that are decelerating or in face of decelerating prepare for this kind of event while outflows coming from the change of conventional monetary policies? Because you said that it could be some kind of preparation on the fiscal side but if you are in a deceleration phase how could we expand the deficit for example or which kind of policies will be used to prepare for the moment?

MR. BAYOUMI: Tam Bayoumi here. Listen, both UMP and non-UMP countries should obviously think about the potential for what will happen and in particular non-UMP countries should take measures to safeguard their stability in preparation for any market turbulence and lay the foundation for sustained growth. This is part of our normal advice, you know, build up the supply potential in the country, have buffers which can be used.

Now, so that's the question about what you do before turbulence starts. If we come to a time when there is market stress then basically the first thing to do is to make sure that the monetary policy framework is clearly understood and credible. It's very important for countries to have and for markets to believe that countries have a monetary policy plan in place. And so that's the first thing.

The second thing is, probably the main instrument in general should be exchange rates. This should be allowed to respond to change in the fundamentals. But there may be a need to guard against disorderly adjustment. If it turns out that the exchange rate seems to be going beyond what would be justified by fundamentals, then it is appropriate in countries with adequate reserves to forestall the underlying adjustments and therefore in that way buffer against market excesses.

There's also the potential of taking micro and macro prudential measures which may have been used to limit the risks asserted with early inflows and these can be reversed. Obviously you have to make sure that this doesn't affect financial stability but this is another avenue down which countries can think.

MS. STANKOVA: We have no more questions. Thank you very much for joining the conference call today and good bye.


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