## SUMMARY OF INFORMAL DISCUSSIONS WITH CENTRAL BANKERS AND OTHER OFFICIALS ON UNCONVENTIONAL MONETARY POLICIES

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### A. Objectives of UMP
- Three principal objectives widely mentioned:
  - ease monetary conditions at the zero lower bound (ZLB)
  - address market dysfunction
  - repair the transmission of monetary policy
- Participants noted analytical distinctions among objectives, but in practice the objectives have been closely linked.

### B. Effectiveness and Channels
- General assessments:
  - UMP was effective in substantially reducing tail risks, reducing deflationary pressures, and restoring market functioning in the U.S., U.K., Japan, and euro area.
  - Bond purchases significantly lowered bond yields in the countries making the purchases.
  - Other measures decreased bank funding costs and lowered lending rates in at least some countries.
- Measurement challenges:
  - Very difficult to estimate the effect of UMP on real activity due to long and variable lags, changes in transmission mechanisms, and absence of a well defined counterfactual.
  - Difficult to estimate effects on lending volumes because some channels are not well captured in standard models.
- Instruments and channels:
  - Forward guidance seen as potentially very effective, though some participants expressed doubts.
  - Thresholds-based guidance (as recently introduced by the U.S. Federal Reserve) was remarked upon favorably by several participants.
  - Opinions differed on whether asset purchases are important to give credibility to forward guidance.
  - Policies implying very large increases in central bank balance sheets are only available to central banks with strong credibility; otherwise inflation would have increased substantially.
  - Bond purchases decrease long-term interest rates through both the portfolio rebalancing and signaling channels; forward guidance mostly works through the signaling channel.
  - The portfolio rebalancing channel relies on frictions in arbitrage along the yield curve.
  - First rounds of bond purchases had strong effects on yields, in part by substantially reducing tail risk; bond purchases likely show diminishing returns over time.
  - Several participants noted marginal costs from further bond purchases could exceed marginal benefits, but predicting the crossing point is difficult.
  - Central banks should generally not stray too far from purchasing government bonds; purchases of private assets may be appropriate in specific circumstances but risk intervening in allocation of credit and bordering on fiscal policy.

### C. Negative Side effects of Bond Purchases
- Most-mentioned potential negative side effects:
  - Perception of debt monetization: can have adverse effects on interest rates and the real economy; mitigation includes preannouncing limits on purchases and credible fiscal medium-term plans.
  - Delays to reforms: persistently low interest rates may reduce perceived need for fiscal, structural, and financial sector reforms.
  - Impaired market functioning, especially in the money market; keeping short-term rates slightly above zero cited as a reason to encourage money market activity.
  - Exit problems: rising interest rates could increase government financing costs; some tensions could arise though these should not impinge on central bank independence.
  - Reach for yield: induced risk taking could over time lead to excesses.
  - Debt forbearance: some evidence of forbearance, mostly in the commercial property sector; differences arise by country.
  - Rhetoric on currency wars: UMP may contribute to exchange rate depreciation and lead other countries to follow suit, but many participants thought the term “currency war” was exaggerated.
  - Distributional effects: lower long-term interest rates reduce the annuity rate for pensioners and strain pension funds, while other segments generally profited from positive wealth effects via higher asset prices and lower discount rates.
  - Impact on saving: extended periods of low interest rates reduce households’ incentive to save and could change the general culture of saving over time.

### D. Cross-Border Spillovers
- Net benefits and risks for EMEs:
  - Most participants considered that, on balance, Emerging Market Economies (EMEs) had benefited from UMP in the U.S., U.K., Japan, and euro area through reduced tail risks, improved financial market functioning, and raised growth prospects.
  - Several participants highlighted possible destabilizing effects: successive rounds of bond purchases produced increasingly negative side effects, including excessive pace and extent of EME currency appreciation and exchange rate volatility.
  - Capital flows to EMEs sometimes fueled asset price bubbles and undermined financial stability due to size and composition of flows.
  - UMP placed an undue burden on policy in EMEs: difficult to tighten monetary policy without attracting capital flows; foreign exchange intervention could be important; macroprudential policy could be overwhelmed; additional measures (such as capital controls) might be needed to curb capital inflows.
  - Widespread agreement on the need to strengthen financial sector resilience to sudden reversals of capital flows and falls in asset prices.

### E. Exit
- Risks and mitigation:
  - Several participants raised the risk of a sharp increase in long-term interest rates, which would dampen recovery in advanced economies, put pressure on government finances, and could trigger sharp changes in capital flows and exchange rates.
  - Most participants agreed that central banks in advanced economies should in principle be able to limit the risk of a sharp increase in long-term rates through enhanced forward guidance and improved communication.
  - Central banks could pre-commit to the timing and pace of asset purchases, though scope remains for unpredictable and possibly disorderly market reactions.
  - With substantial excess reserves, increases in reserve remuneration rates or on liquidity-absorbing instruments would increase market rates as well.

### F. Looking Further Ahead
- Return to normalcy and possible continued tools:
  - Participants mostly agreed that when conditions revert to normal, monetary policy in advanced economies would return to using a short-term policy rate as its main instrument.
  - Some suggested scope to continue using the central bank’s balance sheet to affect the shape of the yield curve for financial stability purposes (for example, if a flatter yield curve encourages financial institutions to issue longer term debt).

*Prepared by the Staff of the International Monetary Fund. Does not necessarily reflect the views of the IMF Executive Board.*

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