Should Unconventional Monetary Policies Become Conventional?

March 31, 2017

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Dominic Quint, and Pau Rabanal. Should Unconventional Monetary Policies Become Conventional?, (USA: International Monetary Fund, 2017) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after shortterm policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.

Subject: Banking, Consumption, Corporate bonds, Financial institutions, Inflation, Monetary policy, National accounts, Prices, Sovereign bonds, Stocks, Unconventional monetary policies

Keywords: Banking, Central bank, Consumption, Corporate bonds, Global, Goods producer, Government bond purchase, Inflation, Long-term debt, Monetary policy, Optimal Rules, Optimal UMP policy, Purchases of government bonds, Sovereign bonds, Supply shock, Transmission mechanism, UMP matter, UMP reaction, UMP rule, UMP shock, Unconventional monetary policies, Unconventional Monetary Policy, Unwinding UMP, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/085
Stock No:

WPIEA2017085
ISBN:

9781475591330
ISSN:

1018-5941

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