## GLOBAL IMPACT AND CHALLENGES OF UNCONVENTIONAL MONETARY POLICIES (_090313)

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### INTRODUCTION — scope and framework
- Paper objectives:
  - Take stock of unconventional monetary policies (UMP) and their impact so far, and look ahead towards exit and prospects for policy coordination.
  - Synthesize earlier staff work, academic and central banking literature, and further staff analysis in the Background Paper.
  - Pose questions where definitive conclusions cannot yet be drawn; provide possible answers while recognizing uncertainty.
- Four covered aspects:
  - Characterization and taxonomy of UMP measures.
  - Evidence on effectiveness: domestic macroeconomic and financial stability effects in UMP countries and effects in non-UMP countries.
  - Exit from UMP: practical aspects of policy design and implementation.
  - Role for policy coordination and the Fund.

### GLOSSARY (selected)
- ABS, AE, BOJ, CDS, CEE, CFMs, CMP, DSGE, ECB, ELA, EME, Fed, FLS, FOMC, FX, GIMF, GSE, LSAP, LTRO, MBS, NFA, NPL, OMO, OMT, QE, QQME, SMP, TAF, UMP, ZIRP, ZLB.

### WHAT ARE UNCONVENTIONAL MONETARY POLICIES?
- Context and rationale:
  - Pre-crisis transmission relied on short-term rate changes and stable banking intermediation; crisis impaired market functioning (interbank markets halted after Lehman; second hit in fall 2011).
  - UMP aimed first to prevent financial meltdown and restore intermediation; later to support aggregate demand at the ZLB.
- Two conceptual categories:
  1. Restore market functioning and intermediation following acute shocks and fragmentation (examples: emergency liquidity, ABS support, SMP, OMT announcement).
  2. Support activity at the ZLB through forward guidance or bond purchases (examples: expanded forward guidance; bond purchases in the U.S., U.K., and Japan).
- Specific instruments cited:
  - Term Auction Facility (TAF); Long-term refinancing operations (LTROs); Funding for Lending Scheme (FLS); Purchase of Mortgage Backed Securities (MBS) and agency debt; Bank covered bonds; Private asset purchases in Japan; Outright Monetary Transactions (OMT); Quantitative and Qualitative Monetary Easing (QQME).
- Similarities/differences with conventional policy:
  - Similar objectives: price stability, financial stability, and, depending on mandate, full employment.
  - Differences: UMP uses portfolio balance channels through large scale asset purchases (LSAP) with potential direct effects on international capital flows and can complicate exit and credibility.

### EFFECTS OF UMP — A. Effects on UMP Countries
- Successes restoring market functioning:
  - A financial meltdown with massive bank deleveraging and defaults was avoided after Lehman and at the peak of the euro area sovereign crisis in fall 2011.
  - Interbank, repo, ABS, and euro peripheral sovereign bond markets regained at least basic function; breakdowns of arbitrage relationships mostly vanished.
- Limits in restoring credit intermediation:
  - U.S. purchases of MBS and agency debt noticeably decreased mortgage yields.
  - U.K. and euro area countries under stress: continued financial fragmentation; credit as a share of GDP contracting (especially non-financial corporate credit); lending rates remain high relative to bond yields and policy rates.
  - Constraining factors: high impaired assets, low profitability, inadequate loss absorption, poor governance, low loan demand.
- Effects on long-term bond yields and expectations:
  - United States: 10-year bond yields decreased by between 90 and 200 bps (since November 2008) due to various bond purchase programs.
  - United Kingdom: estimates range from 45 to 160 bps (since January 2009).
  - Japan: yields drop by about 30 bps (since October 2010), starting from a lower level.
  - Forward guidance has decreased long-term yields; announcements (including forward guidance) had larger effects on expectations of future interest rates than announcements of asset purchases; actual purchases had additional effects.
- Effects on growth and inflation (empirical ranges):
  - Domestic GDP growth increases around 2 percentage points in the U.S. and U.K. (generally lasting around two years), with a range between 0.1 percentage and 8 percentage points.
  - Effects on inflation are as large as 3.6 percentage points (wide range).
  - Spillover Report (IMF 2013d) estimates that a 100 bps decrease in long-term interest rates brought about by bond purchases is estimated to raise global growth from around 0–1.2 percent depending on the country undertaking UMP.
- Caveats:
  - Results derive from empirical relationships or model calibrations with pre-crisis data; dampening factors include weak banking sectors, debt overhang, and greater uncertainty.

### RISKS AND COSTS OF PROLONGED UMP
- Main risks:
  - Reliance on accommodative policy to postpone needed reforms; UMP cannot resolve structural hurdles nor raise long-term growth without reforms.
  - OMT success may have reduced pressure for structural reforms and bank repair in the euro area.
  - In the U.S. and Japan, convincing medium- and longer-term fiscal sustainability plans remain to be developed; Japan needs use of all three arrows of Abenomics.
- Financial-stability and credibility risks:
  - Risk-taking may be amplified: rising duration exposure, high portfolio allocations to fixed income (especially in AEs), riskier positioning by weaker pension funds and insurance companies, delayed bank balance sheet clean-up.
  - Corporate releveraging in the U.S. continues gradually; corporate fundamentals generally remain strong.
  - Prolonged asset purchases may be perceived as monetary financing of government debts or necessary to support weak financial systems, risking credibility and political interference.
- Empirical assessment:
  - No clear evidence yet that marginal costs from UMP exceed marginal benefits; precise threshold unidentified.

### Selected country evidence snippet (as presented)
- U.S. — Literature and Staff:
  - Median (peak) GDP effect: 2.6 (pp); Effects on Inflation (pp): 1.5
  - Range (peak) GDP: 0.1–6.7; Range (peak) Inflation: 0–1.7
  - Duration of effect, quarters: [2–8] GDP; [4–16] Inflation
- U.K. — Literature and Staff:
  - Median (peak) GDP effect: 2.4 (pp); Effects on Inflation (pp): 1.5
  - Range (peak) GDP: 0.5–8; Range (peak) Inflation: 1.1–8
  - Duration of effect, quarters: [2–4+] GDP; [3–6] Inflation

### EFFECTS OF UMP — B. Effects on Non-UMP Countries and Spillovers
- Early-stage benefits:
  - Non-UMP countries, including many EMEs, benefited early on from policies that supported market functioning and intermediation; a severe meltdown in UMP countries would have had dire global consequences.
- Positive channels:
  - Aggressive accommodation in UMP countries raises global growth through higher demand for EM exports; non-UMP countries benefit from lower costs of capital, lower sovereign financing costs, and higher equity prices.
- Negative channels and financial-stability concerns:
  - Prolonged capital inflows and cheap foreign funding can undermine financial stability in recipient countries: rapid credit expansion, asset price bubbles, higher leverage (especially in foreign currency), risks of disorderly adjustment and later rapid flow reversals.
  - Bond purchases may induce portfolio rebalancing toward non-UMP countries, driving capital inflows and currency appreciation.
- Policy implications for recipient countries:
  - Allow exchange rates to respond to fundamentals but guard against disorderly adjustment.
  - Trade-offs: tightening monetary policy may accentuate appreciation; looser policy may raise inflation and financial-stability risks.
  - Use micro- and macroprudential policies as part of a broader sound policy mix.

### BOX 1 — Macroeconomic spillovers from UMP (model simulations)
- Models used: GIMF (multi-country DSGE) and a DSGE model with non-linear dynamics in credit cycles and capital flows.
- GIMF results (two-region setup: G-3 and emerging economies):
  - Relative to a counterfactual where monetary policy is unable to respond for two years due to the ZLB, GDP in emerging markets returns to baseline faster when the G-3 respond aggressively (as implied by QE).
  - Positive effect partly offset by relative appreciation in emerging market currencies.
  - Growth composition differs by exchange rate response: more export-driven if appreciation resisted; more domestic demand-driven if appreciation allowed.
- Non-linear model dynamics:
  - Amplification via pro-cyclical lending, lower capital buffers, asset price increases, and unhedged foreign currency exposure can lead to mounting vulnerabilities and sharper reversals when inflows stop.

### BOX 2 — Spillovers on asset prices in the rest of the world
- U.S. UMP had substantial spillover effects: boosted equities, government and corporate bonds, and tightened CDS spreads globally.
- External factors accounted for two-thirds of local currency yield compression in EMEs since 2008 (April 2013 GFSR).
- LSAP heterogeneity:
  - LSAP 1 associated with U.S. dollar appreciation; LSAP 2 and later associated with U.S. dollar depreciation.
  - Capital flows following actual purchases stronger than those following announcements.
- Japan QQME (April 2013):
  - Appreciation of foreign currencies vis-à-vis the Japanese yen of about 3 percent.
  - Widespread fall in foreign equity prices of around 2 percent.

### BOX 3 — Macroeconomic and financial outcomes in 13 non-UMP case-study countries (period up to May 2013)
- Sample: 13 of the largest non-UMP countries, accounting for nearly 40 percent of global GDP.
- Key observations up to the Federal Reserve’s first tapering announcement in May 2013:
  - Capital inflows after the crisis generally exceeded their peak during the 2000–07 period; composition shifted to portfolio and debt flows.
  - In some countries (Australia, Brazil, Canada, China, Indonesia, Mexico, Thailand, Turkey) capital inflows had been on an increasing trend starting in the early 2000s.
  - Capital inflows in India, Russia, and South Africa after the crisis have not returned to pre-crisis levels but are larger than in the early 2000s.
  - Since 2011, signs that capital inflows are moderating; some countries saw net outflows in the first half of 2013.
  - No country exhibited wide-spread or acute macroeconomic or financial instability up to May 2013.
  - Rapid asset price increases, corporate leverage, and FX exposure in several countries (real estate buoyant in cities of Brazil, Canada, China, Thailand; stock prices rebounded in China, Indonesia, Mexico, Russia, Thailand, Turkey).
- Policy responses observed:
  - Allow exchange rate appreciation with limited intervention and ease monetary policy consistent with inflation objectives: Australia, Canada, Mexico, Poland.
  - FX intervention: many EMEs.
  - CFMs introduced: Brazil, Indonesia, Korea.
  - Extensive capital controls maintained: China, India.
  - Capital outflow liberalization: South Africa, Thailand.
  - Micro- and macroprudential measures actively used across AEs and EMEs.

### SELECTED EXACT FIGURES AND STATISTICS (as cited)
- 13 (case-study countries)
- nearly 40 percent of global GDP
- 2000–07 (pre-crisis peak comparison period)
- since 2011 (moderation in capital inflows)
- first half of 2013 (some net outflows observed)
- US$1.9 trillion (U.S. reserve balances)
- US$20–50 billion (U.S. pre-crisis norms)
- £300 billion (U.K. reserve balances)
- £20 billion (U.K. pre-crisis norms)
- €165 billion (excess reserves in the euro area, as of August 6, 2013)

### EXIT FROM UMP — operational and sequencing issues
- Two broad UMP groups and exit drivers:
  - Instruments to restore market functioning and intermediation — can be withdrawn once the financial sector stabilizes; timing may be market-driven.
  - Instruments to support activity at the ZLB — exit conditioned on broader economic developments (inflation, output gap, financial stability).
- Exit phases (some overlapping):
  - Adjustment of forward guidance and gradual reduction (tapering) of asset purchases; timing of forward guidance changes is difficult.
  - Increases in policy rates; short-term policy rate increases might occur while or before substantial excess reserves are drained.
  - Shrinking the central bank balance sheet; reducing asset holdings may help drain excess reserves but is not essential to raising interest rates.
- Trade-offs and volatility:
  - Earlier exit than inflation/output considerations may be warranted if accommodative conditions threaten financial stability.
  - Delaying exit risks undermining credibility and higher inflation later.
  - Exit likely bumpier than simple models predict due to signaling limits, liquidity surpluses, and structural market changes.

### CENTRAL BANK OPERATIONAL CAPACITY TO CONTROL SHORT-TERM MARKET RATES (Box 4)
- Pre-crisis mechanics: banks structurally short of reserve money; central banks supplied shortfall via OMO at or near policy rate.
- Post-UMP liquidity surpluses:
  - U.S. reserve balances around US$1.9 trillion versus pre-crisis norms of US$20–50 billion.
  - U.K. reserve balances nearly £300 billion compared with £20 billion.
  - Euro area excess reserves some €165 billion (as of August 6, 2013) compared with virtually zero pre-crisis.
  - Extra liquidity has dulled competition for funds; relationship between central bank transaction rates and general market rates loosened.
- Instruments to drain liquidity:
  - Term deposits, repo, issuance of central bank securities, reverse repos, and active sale of assets.
  - Some operations may need to pay a higher rate than targeted short-term market rates to incentivize locking up liquidity.
  - Federal Reserve tested Term Deposit Facility and reverse repos to a wider counterparty list.

### COMMUNICATION, TACTICAL INTERVENTIONS, AND HISTORICAL LESSONS
- Forward guidance:
  - Emphasizes that short-term rate increases will reflect the economic outlook and will not be unduly rapid.
  - Clear communication on exit mechanics and guiding principles for asset sales helps manage risks.
- Tactical asset purchases and yield targeting:
  - Tactical purchases can be used if yields overshoot fundamentals but effectiveness may be low and costs high; yield curve targets during exit would be difficult and likely delay normalization.
- Historical exits (Box 5) lessons:
  - Fed 1994: rapid 300 bps short-rate increase; pronounced market reaction.
  - Fed 2004–06: gradual, telegraphed tightening; milder reaction.
  - BOJ 2000: aborted exit; early exit raised call rate to 25 bps then reversed.
  - BOJ 2006: exited QE by allowing short-term assets to roll off; clear communication produced little bond market impact.
  - Unwinding facilitated by short balance sheet maturity where injections had sunset clauses and assets had short maturities.

### GLOBAL SPILLOVERS, AMPLIFICATION MECHANISMS, AND RISKS (Sections 30–33; Box 6)
- Expected international responses to UMP exit:
  - In UMP countries not exiting: expected short-term rates might rise due to business cycle correlations; risk premia might increase in weak-growth countries.
  - In non-UMP countries: currencies likely to depreciate and bond yields might rise if monetary policy tightens via growth spillovers; term premia might rise from repricing of risk or liquidity premia changes.
- Capital flow and asset price risks:
  - Some capital flow reversal and higher borrowing costs expected; market imperfections can amplify shocks, especially in EMEs with large inflows.
  - Repricing of risk can induce runs by highly leveraged investors; thin markets can amplify price moves and trigger sale spirals.
- Financial system amplification:
  - Potential rise in non-performing loans, shrinkage of capital buffers, evaporation of funding, and contagion that broadens asset price movements and outflows.
  - Co-movement in capital flows was noticeably higher following Fed tapering announcements than after earlier asset purchase announcements.
- Non-linear model illustration:
  - Unexpected foreign interest rate rise → currency depreciation → sharp asset price decline → higher domestic currency value of foreign currency debt → consumption falls, debt rises, non-performing loans increase → banks’ capital falls → lending tightens → sharp growth drop and spike in current account surplus.
  - Outcome mitigated by limits on foreign currency debt and stronger financial systems.

### EXPOSURE AND RESILIENCE METRICS FOR NON-UMP COUNTRIES (Sections 33; Box 7)
- Exposure measures:
  - Sovereign credit ratings; correlations of 10-year bond rates with U.S. rates (regression on FOMC announcement days using daily data Jan 1, 2003–May 20, 2013); cumulative 10-year bond rate changes on Fed tapering announcements (May 22 and June 19, 2013); extent of capital outflows following tapering announcements.
- Resilience measures:
  - Domestic market conditions (market size, turnover, domestic funds’ ability to supplant foreign investors); reliance on foreign funding (short-term); room for policy maneuver (currency depreciation relative to fundamentals; FX reserves; appropriateness of higher interest rates relative to inflation and output gap; fiscal room; banking sector strength).
- Empirical assessment:
  - More developed non-UMP economies (Australia — higher resilience; Canada and Korea — lower exposure) and other EMEs with higher resilience/lower exposure expected to fare relatively well.
  - Some countries are more vulnerable due to higher exposure and lower resilience; some are borderline.

### POLICY OPTIONS FOR NON-UMP COUNTRIES FACING SPILLOVERS (Section 34)
- General guidance:
  - Enhance fundamentals to increase policy maneuver room.
  - Monetary policy and communication: rely on credibility and active communication to focus on stable inflation and orderly markets; respond to cyclical positions.
  - Exchange rate and intervention: allow exchange rates to respond to fundamentals but smooth volatility with intervention where reserves permit; do not forestall necessary external adjustment.
  - Macro- and microprudential policies: use to limit risks from inflows; reverse only if safe; CFMs to restrain outflows only in crisis or near-crisis conditions.
  - Access to central bank FX swap lines may help cope with turbulence.

### INTERNATIONAL COORDINATION AND THE FUND’S ROLE (Sections 35–38)
- Coordination facets:
  - UMP economies alter internal policy mix; implement structural, fiscal, and banking reforms to allow earlier unwind of UMP.
  - Non-UMP countries pursue reforms to foster rebalancing and sustainable medium-term growth.
  - Collaboration on regulatory and macroprudential policies to help recipient countries manage spillovers.
  - Prepare for exit via FX swap lines and advanced warning of exit prospects.
  - 2013 Spillover Report suggests a different policy mix could raise global GDP about 3 percent above baseline after 10 years.
- Incentives required:
  - Countries must see clear medium-term net benefits from coordination.
  - Conditioning UMP on implementation of other reforms is limited in practice; central banks unlikely to impose conditions except possibly for OMT.
- Fund’s role:
  - Surveillance and multilateral analysis (WEO, GFSR, spillover framework, External Sector Assessments).
  - Lending tools: Flexible Credit Line; traditional lending arrangements; technical assistance for domestic policies (e.g., macroprudential).
  - Policy buffers/tools: exchange rate flexibility, macroprudential policies, reserves, swap lines.
  - Fund analysis can assess spillovers, suggest areas for cooperation, and inform forums like the G-20 Mutual Assessment Process.

### APPENDIX — selected empirical literature highlights
- Chen et al. (1995-2012): U.S. QE stimulated domestic economy and global asset prices; affected GDP, inflation, stock prices, bank credit, FX pressure, money growth.
- Chinn (2008M09-2013M03): Increase in the money-base/GDP ratio weakens the dollar at horizons of two to three months.
- Bauer and Neely (1995-2009): Signaling significant in U.S. and Canada; portfolio balance effects important in Australia and Germany; Japan saw absent signaling and modest PB effects.
- Moore et al. (2004-2010): U.S. LSAPs increased portfolio flows into many EMEs; a 10 basis point decrease in U.S. 10-year Treasury yield raises foreign share in EM government bond markets by 0.4 percentage points and lowers their government bond yields by roughly 1.7 basis points.
- Neely (intraday studies): A one standard deviation surprise easing in unconventional policy leads to roughly a 40 basis point decline in the dollar within 60 minutes; QE1 boosted bond and equity prices and led to dollar appreciation, while QE2 boosted equity prices worldwide and led to dollar depreciation; Fed policies were pro-cyclical for capital flows to EMEs in QE1 and counter-cyclical in QE2.

*Source: INTRODUCTION and excerpts from “GLOBAL IMPACT AND CHALLENGES OF UNCONVENTIONAL MONETARY POLICIES,” INTERNATIONAL MONETARY FUND (document _090313).*

### INTRODUCTION  __________________________________________________________________________________  5

### INTRODUCTION

### Overview
- This paper takes stock of unconventional monetary policies (UMP) and their impact so far, and looks ahead towards exit and prospects for policy coordination.
- It synthesizes earlier staff work on UMP, the findings of academic and central banking literature, and further staff analysis contained in the Background Paper.
- Where definitive conclusions cannot yet be drawn, the paper poses relevant questions and provides possible answers while recognizing remaining uncertainty.
- The paper covers four key aspects of UMP:
  - A characterization and taxonomy of diverse central bank measures falling under UMP.
  - The available evidence on the effectiveness of UMP, including domestic macroeconomic and financial stability effects in UMP countries and effects in non-UMP countries.
  - Exit from UMP policies, focusing on practical aspects of policy design and implementation.
  - The role for policy coordination and the role of the Fund.

*Key citations referenced in the introduction: “Unconventional Monetary Policies—Recent Experiences and Prospects” (IMF 2013a); Chapters 1 and 3 of the April 2013 Global Financial Stability Report (GFSR) (IMF 2013b); the Spillover Report (IMF 2013d); External Sector Report (IMF 2013c); Chapter 3 of the April 2013 World Economic Outlook (WEO) (IMF 2013e).*

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### Glossary (selected terms from the source)
- ABS Asset Backed Securities
- AE Advanced Economy
- BOJ Bank of Japan
- CDS Credit Default Swap
- CEE Central and Eastern Europe
- CFMs Capital Flow Management Measures
- CMP Conventional Monetary Policies
- DSGE Dynamic Stochastic General Equilibrium
- ECB European Central Bank
- ELA Emergency Lending Assistance
- EME Emerging Market Economy
- Fed The United States Federal Reserve Bank
- FLS Funding for Lending Scheme
- FOMC Federal Open Market Committee
- FX Foreign Exchange
- GIMF Global Integrated Monetary and Fiscal Model
- GSE Government Sponsored Enterprise
- LSAP Large Scale Asset Purchase
- LTRO Long Term Refinancing Operation
- MBS Mortgage Backed Securities
- NFA Net Foreign Assets
- NPL Non-performing Loan
- OMO Open Market Operations
- OMT Outright Monetary Transactions
- QE Quantitative Easing
- QQME Quantitative and Qualitative Monetary Easing Program
- SMP Securities Market Program
- TAF Term Auction Facility
- UMP Unconventional Monetary Policies
- ZIRP Zero Interest Rate Policy
- ZLB Zero Lower Bound

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### WHAT ARE UNCONVENTIONAL MONETARY POLICIES?

### Context and rationale
- Before the crisis, central banks set policy via changes to short-term rates transmitted to longer-term bond rates and riskier assets through arbitrage; transmission relied on stable banking systems.
- The crisis impaired market functioning and financial stability, causing interbank markets to halt after the Lehman bankruptcy and later a second hit for European banks in fall 2011.
- UMP initially sought to prevent financial system meltdown and then to strengthen financial intermediation—measures akin to lenders of last resort addressing runs, multiple equilibria, collapses of investor confidence, and selling spirals.
- Instruments were unconventional in breadth and scale: liquidity provided in unprecedented amounts, to an expanded set of recipients, and aimed at supporting market functioning and strengthening commercial bank balance sheets.

### Categories and examples
- Two main conceptual categories of UMP measures:
  1. Policies to restore market functioning and intermediation following acute shocks and drawn-out financial fragmentation (examples: emergency liquidity, ABS support, SMP, OMT announcement).
  2. Policies to provide support to economic activity at the ZLB through forward guidance or bond purchases (examples: expanded forward guidance; bond purchases in the U.S., U.K., and Japan).
- Specific instruments cited:
  - Term Auction Facility (TAF) in the U.S.
  - Long-term refinancing operations (LTROs) in the euro area
  - Funding for Lending Scheme (FLS) in the U.K.
  - Purchase of Mortgage Backed Securities (MBS) and agency debt in the U.S.
  - Bank covered bonds in the euro area
  - Private asset purchases in Japan
  - Outright Monetary Transactions (OMT) announced in the euro area
  - Quantitative and Qualitative Monetary Easing (QQME) announced in Japan in 2013

### Similarities and differences with conventional policy
- Similarities:
  - Fundamental objectives remain: support price and financial stability and, depending on mandates, full employment.
  - Broad transmission to the macroeconomy and to other countries via lower longer-term bond rates is similar in concept.
- Differences:
  - UMP uses portfolio balance channels through large scale asset purchases (LSAP) with potential direct effects on international capital flows.
  - Bond purchases may erode central bank credibility in certain circumstances and complicate exit.

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### EFFECTS OF UMP — A. Effects on UMP Countries

### Successes in restoring market functioning
- Policies to restore market functioning and intermediation were successful at overcoming acute instability:
  - A financial meltdown with massive bank deleveraging and defaults was avoided following the Lehman bankruptcy and at the peak of the euro area sovereign crisis in fall 2011.
  - Markets that had frozen—interbank, repo, ABS, euro area peripheral sovereign bonds—all regained at least basic function.
  - Breakdowns of standard arbitrage relationships, such as covered interest parity, mostly vanished.

### Limits in restoring credit intermediation
- Measures to restore drawn-out weakness in financial intermediation were not uniformly effective:
  - Purchases of MBS and agency debt in the U.S. seem to have noticeably decreased mortgage yields.
  - In the U.K. and especially in euro area countries under market stress, the financial system remains fragmented: credit as a share of GDP has been contracting (especially non-financial corporate credit), and lending rates have remained stubbornly high relative to bond yields and policy rates.
  - Factors limiting effectiveness include structural banking problems: high impaired assets, low profitability, inadequate loss absorption capacity, and poor governance and incentives; macroeconomic uncertainties and low demand for loans also dampen outcomes.

### Effects on long-term bond yields and expectations
- Policies to support demand at the ZLB significantly decreased long-term bond rates:
  - United States: 10-year bond yields decreased by between 90 and 200 bps due to various bond purchase programs (since November 2008).
  - United Kingdom: estimates range from 45 to 160 bps (since January 2009).
  - Japan: yields drop by about 30 bps (since October 2010), although Japanese yields started from a lower level.
- Early bond purchase programs significantly decreased tail risks of severe economic contractions.
- Evidence is mounting on the effectiveness of forward guidance in decreasing long-term bond yields, especially when it convinces markets of a deviation from central banks’ “normal” reaction functions.
- Background Paper analysis finds announcements, including forward guidance, had larger effects on expectations of future interest rates than announcements of asset purchases; actual asset purchases seem to have had effects in addition to announcements, suggesting different channels.

### Effects on growth and inflation
- Policies to support demand at the ZLB appear to have boosted growth and prevented deflation, though effects are difficult to measure due to counterfactual uncertainty.
- Empirical findings to date support that both GDP growth and inflation were raised by bond purchases, but:
  - Results derive from empirical relationships or model calibrations with pre-crisis data, which may not necessarily hold today.
  - Dampening factors include weak banking sector, debt overhang in household and government sectors, and greater macroeconomic and policy uncertainty.
- Representative empirical ranges reported in the literature (summarized in IMF 2013a):
  - Domestic GDP growth increases around 2 percentage points in the U.S. and U.K. (generally lasting around two years), with a range between 0.1 percentage and 8 percentage points.
  - Effects on inflation are as large as 3.6 percentage points, though within a wide range.
  - The 2013 Spillover Report (IMF 2013d) estimates that a 100 bps decrease in long-term interest rates brought about by bond purchases is estimated to raise global growth from around 0–1.2 percent depending on the country undertaking UMP.

---

*Source: INTRODUCTION, “GLOBAL IMPACT AND CHALLENGES OF UNCONVENTIONAL MONETARY POLICIES,” INTERNATIONAL MONETARY FUND*

### 15.      UMP may give rise to risks. In large part, these risks stem from monetary policy remaining

### 15.      UMP may give rise to risks.

### Main risks from UMP and prolonged accommodative policy
- The accommodative policy stance provided by UMP (which conventional monetary policy could equally deliver) may be relied upon to do too much, so that the breathing space it offers is not used to enact necessary but difficult reforms.
- UMP, like its conventional counterpart, cannot resolve structural hurdles nor raise long-term growth; UMP must be accompanied by necessary reforms to return to a growth path sustained by fundamentals, so that UMP can eventually be unwound.
- Some reforms—notably structural reforms—may take time to affect the real economy and thus cannot substitute for monetary policy accommodation in the short-term; other reforms, such as repairing bank balance sheets or ending policy uncertainty with a credible commitment to fiscal sustainability, might have more immediate effects on the macroeconomy.
- The evident success of OMT in the euro area in decreasing bond spreads in countries under market stress might have taken pressure off needed structural reforms and progress on repairing bank balance sheets and implementing a banking union.
- In the U.S. and Japan, convincing plans for medium- and longer-term fiscal sustainability remain to be developed. In Japan all three arrows of Abenomics—including plans to put fiscal policy on a sustainable path—need to be used.
- Strong and sustainable growth also requires major structural reforms in non-UMP countries to boost global demand and lower imbalances.

### Financial-stability and credibility risks
- Financial stability may be adversely affected if risk-taking behavior driven by persistently accommodative monetary policies (either unconventional or conventional) goes too far.
  - Evidence suggests rising exposure to duration in global bond portfolios and high portfolio allocations to fixed income, especially in AEs, increasing interest sensitivity of bond portfolios.
  - Evidence of riskier positioning by weaker pension funds and insurance companies, and delays in cleaning up bank balance sheets in UMP countries.
  - High-yield and investment grade corporates continue to gradually relever in the U.S., though corporate credit fundamentals generally remain strong.
  - The ability of micro- and macroprudential policies to counter these risks is still uncertain, and may be limited by slow implementation.
- Prolonged asset purchases may undermine the credibility of central banks, and by extension inflation expectations.
  - Risk stems from bond purchases being seen as monetary financing of government debts, or as necessary to support a weak financial system.
  - Political interference could mount owing to prospects of diminished central bank profit transfers to the government if there are large losses on growing bond portfolios.

### Empirical assessment of costs and benefits
- Thus far, there is no clear evidence that marginal costs from UMP are greater than marginal benefits.
- It is very difficult to identify the threshold where marginal costs exceed marginal benefits precisely.
- Even theoretically plausible diminishing marginal benefits are not unambiguously supported by the data; more work is warranted.

### Country evidence snippet (table extract as presented)
- CountryEffects on GDP growth (pp)    Effects on Inflation (pp)
- U.S.Literature and Staff 1/
- Median (peak)2.61.5
- Range (peak)0.1–6.70–1.7
- [Duration of effect, quarters][2–8][4–16]
- U.K.Literature and Staff 1/
- Median (peak)2.41.5
- Range (peak)0.5–81.1–8
- [Duration of effect, quarters][2–4+][3–6]
- Source: IMF 2013a.

### Effects on non-UMP countries
- Early-stage benefits:
  - Non-UMP countries, including many EMEs, benefited from UMP early on, particularly from policies to support market functioning and intermediation; a severe financial meltdown in UMP countries would have had dire global consequences.
- Subsequent benefits and costs harder to ascertain due to counterfactual challenges and model limitations.
- Positive channels:
  - Most general equilibrium models suggest aggressive monetary accommodation in UMP countries in response to a negative shock is beneficial for non-UMP countries, leading to higher global growth.
  - Proper monetary policy response in non-UMP countries limits currency appreciation and helps support growth.
  - Non-UMP countries benefit from lower costs of capital and sovereign financing (lower bond yields), and higher equity prices.
- Negative channels and financial-stability concerns:
  - Prolonged period of capital inflows and cheap foreign financing can undermine financial stability in recipient countries.
  - Lower interest rates in AEs induce capital flows to higher-return countries; prolonged low rates may accentuate capital flows.
  - Bond purchases may have induced further capital outflows via portfolio rebalancing effects, with investors seeking equivalent bonds in non-UMP countries.
  - Strong capital inflows can cause large and rapid currency appreciation, inflicting longer-lasting harm on export sectors through hysteresis and lowering returns from net foreign assets (NFAs).
  - Financial instability risks include rapid credit expansion, asset price bubbles, higher leverage (especially in foreign currency), and risks of disorderly adjustment and later rapid flow reversals.
- Policy implications for recipient countries:
  - Policymakers should allow exchange rates to respond to fundamentals but guard against risks of disorderly adjustment.
  - Countries face trade-offs between tightening monetary policy (which could accentuate appreciation) and maintaining looser policy (which could raise inflation and undermine financial stability).
  - Micro- and macroprudential policies are available and should be used, but need to be part of a broader sound policy mix to be fully effective against excessive leverage and financial fragility.

### Box 1 — Macroeconomic spillovers from UMP (model simulations)
- Models used: a standard multi-country DSGE model (GIMF) and a DSGE model with non-linear dynamics in credit cycles and capital flows.
- GIMF setup:
  - Two-region simplification: G-3 (United States, the euro area, and Japan) and emerging economies (emerging Asia and Latin America).
  - Counterfactual: monetary policy unable to respond for two years due to the ZLB.
  - Relative to that counterfactual, GDP in emerging markets returns to baseline faster when the G-3 respond with aggressive rate cuts (as implied by QE), because higher G-3 GDP raises demand for emerging market exports.
  - This positive effect is partially offset by relative appreciation in emerging market currencies stemming from a positive interest rate differential versus the G-3.
  - If capital inflows to emerging markets reduce corporate risk premium and lower cost of capital, real investment rises, leading to higher GDP above baseline and eventual tightening of monetary policy to re-anchor inflation.
  - GIMF suggests growth outcomes in EMEs do not differ much in level whether they resist appreciation pressures or not, but composition differs: more export-driven when appreciation is resisted and more domestic demand-driven when appreciation is allowed.
- Non-linear model:
  - Introduces amplification mechanisms: pro-cyclicality in lending, capital buffers and asset price valuations, non-diversifiable credit risk, and unhedged foreign currency exposure.
  - Calibration: broadly on small open economies typical of emerging Europe.
  - Dynamics illustrated:
    - Capital inflows lower borrowing costs and strengthen the currency, spurring credit and increasing asset prices.
    - Higher asset prices and stronger currency lower loan-to-value ratios (especially for foreign currency loans), increasing demand for credit.
    - Banks hold lower capital buffers as perceived borrower risk falls, boosting consumption, investment, and imports, worsening the current account and attracting further inflows.
    - Financial vulnerabilities mount: rapid credit growth, diminished bank capital buffers, higher household leverage, rising asset prices, and currency appreciation.
    - Economies with less foreign currency debt and more resilient financial sectors (reflecting stronger prudential policies) experience less amplification and lower vulnerability when flows reverse.

### Box 2 — Spillovers from UMP on asset prices in the rest of the world
- Empirical literature finds U.S. UMP had substantial spillover effects to other advanced and emerging economies, boosting a broad range of asset prices globally: equities, government and corporate bonds, and CDS spreads.
- External factors accounted for two-thirds of the local currency yield compression in EMEs since 2008, with domestic improvements explaining the remainder (April 2013 GFSR).
- LSAP heterogeneity:
  - LSAP 1 triggered portfolio rebalancing out of EMEs into the U.S. and was associated with appreciation of the U.S. dollar.
  - LSAP 2 and later programs triggered rebalancing in the opposite direction and were associated with a depreciation of the U.S. dollar.
  - Staff work suggests outflows might have reduced the effects of asset purchases as demand for bonds decreased contemporaneously with lower supply.
  - Exchange rate responses were similar in magnitude to monetary policy surprises in the pre-crisis period.
  - Capital tended to flow into EMEs following surprise announcements, especially when these involved explicit forward guidance.
  - Capital flows following actual purchases seem to have been stronger than those following announcements of asset purchases.
- ECB and CEE region:
  - UMP by the ECB may have had a significant, largely positive, impact on the central and eastern European (CEE) region; CEE benefited from stronger trade with the euro area and support to euro liquidity provision.
- Japan QQME:
  - QQME announcement in April 2013 led to an appreciation of foreign currencies vis-à-vis the Japanese yen of about 3 percent, and a widespread fall in foreign equity prices of around 2 percent (IMF 2013a).
  - Near-term negative spillovers to some trade competitors via the exchange rate channel are possible, but higher long-run growth in Japan (if all three arrows of Abenomics are pursued) and easier global financial conditions should generate positive net spillovers.

*Source: IMF 2013a.*

### 20.      In the period up to the Federal Reserve’s first tapering announcement in May 2013,

### 090313 - 20. In the period up to the Federal Reserve’s first tapering announcement in May 2013

### Macroeconomic and financial outcomes in non-UMP countries (Box 3)
- Sample and scope
  - Case studies cover 13 of the largest non-UMP countries, accounting for nearly 40 percent of global GDP.
  - The period analyzed is up to the Federal Reserve’s first tapering announcement in May 2013.
  - The case studies include both EMEs and some AEs.
  - Case studies cannot distinguish the effects of UMP from other factors; model-based analysis and econometric spillover work face counterfactual and scope limitations.

- Key findings on capital flows and asset prices
  - Capital inflows after the crisis generally exceeded their peak during the 2000–07 period, with the composition shifting to portfolio and debt flows.
  - In some countries (Australia, Brazil, Canada, China, Indonesia, Mexico, Thailand, Turkey) capital inflows had been on an increasing trend starting in the early 2000s.
  - Capital inflows in India, Russia, and South Africa after the crisis have not returned to pre-crisis levels but are larger than in the early 2000s.
  - Since 2011, signs that capital inflows are moderating in many studied countries; some countries saw net outflows in the first half of 2013.

- Financial stability and sectoral pressures
  - During the period, no country exhibited wide-spread or acute macroeconomic or financial instability up to May 2013.
  - Asset prices increased rapidly in many cases, alongside corporate leverage and foreign exchange exposure.
    - Real estate buoyant in some cities of Brazil, Canada, China, and Thailand.
    - Stock prices rebounded sharply in China, Indonesia, Mexico, Russia, Thailand, and Turkey.
    - Rapid credit expansion observed in Brazil, China, and Turkey, including foreign currency denominated debt.
  - Signs of growing sensitivity to higher global interest rates and market volatility across asset classes, and a slowing in improvement of emerging market corporate credit profiles.
  - In recent months some of these developments have been partly reversed.

- External positions and exchange rates
  - While some countries experienced external instability, no case showed exchange rates greatly overvalued to the extent of severely damaging the export sector, nor especially large current account deficits (figures referenced in the 2013 External Sector Report).
  - Earlier in the year, currencies were overvalued and current accounts weaker than medium-term fundamentals in Brazil, Canada, South Africa, and Turkey, although significant exchange rate adjustments occurred subsequently.
  - Further appreciation and current account adjustment warranted in countries such as China and Korea.

- Policy responses
  - Countries used a variety of policy tools to manage capital flow risks:
    - Allowed exchange rate appreciation with limited intervention and eased monetary policy consistent with inflation objectives: Australia, Canada, Mexico, Poland.
    - FX intervention to manage volatility or stem appreciation: many EMEs.
    - Capital flow management measures (CFMs) introduced: Brazil, Indonesia, Korea.
    - Extensive capital controls maintained: China, India.
    - Capital outflow liberalization: South Africa, Thailand.
    - Micro- and macroprudential measures actively used across AEs and EMEs to address excessive credit growth and financial sector vulnerabilities.
  - Banking systems appear broadly sound, reflecting strengthened regulatory and supervisory frameworks and macroprudential actions; adequate loss-absorbing buffers despite rapid credit growth and rising current account deficits in some cases.

### Exit from UMP — conceptual framing and policy considerations (Sections 21–27)
- Types of UMP and differing exit drivers
  - Two broad UMP groups:
    - Instruments to restore market functioning and intermediation — can be withdrawn once financial sector stabilizes; market-driven timing may apply for some facilities.
    - Instruments to support activity at the ZLB — exit conditioned on broader economic developments (inflation, output gap, financial stability).

- Operational and sequencing issues
  - Exit phases (some overlapping):
    - Adjustment of forward guidance and a gradual reduction (tapering) of asset purchases. Timing of forward guidance changes is difficult: central banks balance preparing markets and maintaining credibility about "lower for longer" guidance.
    - Increases in policy rates. Short-term policy rate increases might occur while or before substantial excess reserves are drained. Market rates guided by the central bank’s overnight deposit rate in this period.
    - Shrinking the central bank balance sheet. Reducing asset holdings may help drain excess reserves, though not essential to raising interest rates.

- Financial-stability vs inflation/output timing trade-offs
  - Earlier exit than inflation/output considerations may be warranted if accommodative conditions threaten financial stability and prudential measures are insufficient.
  - Delaying exit to avoid consequences (e.g., rise in sovereign financing costs or banks’ non-performing loans) risks undermining credibility and could lead to higher inflation later.

- Practical uncertainties and likely volatility
  - Exit is likely to be bumpier than in simple models. Potential sources of increased volatility in long-term rates include:
    - Uncertainty about the future path of policy rates due to limitations of forward guidance; markets may anticipate faster tightening later.
    - Uncertainty about the central bank’s ability to control short-term market rates during exit in an environment of substantial excess liquidity.
    - Uncertainty about effects of asset sales on prices; both announcement and sale effects should be expected.
    - Recent changes in structural market liquidity (e.g., reduced broker-dealer inventories and changed leverage/duration exposures of bond investors) could amplify market reactions.

- Modeling vs practice
  - In simple models, correctly anticipated exit would cause a one-time jump in long rates with limited subsequent volatility.
  - In practice, market signaling limits, liquidity surpluses, and structural market changes can lead to greater volatility and less predictable transmission.

### Central bank operational capacity to control short-term market rates (Box 4)
- Pre-crisis mechanics
  - Pre-crisis, banks were structurally short of reserve money; central banks supplied the shortfall via open market operations at or close to the policy rate, enabling arbitrage that aligned various market rates.

- Post-UMP liquidity surpluses and transmission challenges
  - UMP operations expanded central bank assets and left markets with large surplus liquidity:
    - In the U.S., reserve balances total around US$1.9 trillion versus pre-crisis norms of US$20–50 billion.
    - In the U.K., reserve balances are nearly £300 billion compared with £20 billion.
    - In the euro area, excess reserves were some €165 billion (as of August 6, 2013) compared with virtually zero pre-crisis.
  - Extra liquidity has dulled competition for funds, loosening the relationship between central bank transaction rates and general market rates.
  - Some wholesale market rates have varied below the policy-rate floor because non-banks cannot access deposit facilities and stronger banks require spreads to cover costs.

- Policy instruments and implications
  - Central banks can increase interbank rates by raising deposit rates independently of balance sheet size, but keeping wider market rates tightly aligned may be harder.
  - Restoring a tight link between interbank and other market rates likely requires substantial withdrawal of excess reserves, a process that may take years and involve market discovery to estimate reserve demand.
  - Instruments to drain surplus liquidity include term deposits, repo, issuance of central bank securities, reverse repos, and—if necessary—active sale of assets.
  - Some liquidity-draining operations may need to pay a higher rate than targeted short-term market rates to incentivize locking up liquidity.
  - The Federal Reserve has tested reserve-draining operations such as the Term Deposit Facility and reverse repos to a wider counterparty list.

### Selected exact figures and statistics cited in the text
- 13 (case-study countries)
- nearly 40 percent of global GDP
- 2000–07 (pre-crisis peak comparison period)
- since 2011 (moderation in capital inflows)
- first half of 2013 (some net outflows observed)
- US$1.9 trillion (U.S. reserve balances)
- US$20–50 billion (U.S. pre-crisis norms)
- £300 billion (U.K. reserve balances)
- £20 billion (U.K. pre-crisis norms)
- €165 billion (excess reserves in the euro area, as of August 6, 2013)

*International Monetary Fund — GLOBAL IMPACT AND CHALLENGES OF UNCONVENTIONAL MONETARY POLICIES (Excerpts from chapter and boxes).*

### 28.      The primary tool to contain instability is communication. Forward guidance is one

### The primary tool to contain instability is communication. Forward guidance is one

### Communication and forward guidance
- Forward guidance is a component of a communications strategy that emphasizes short-term (policy) interest rate increases will reflect the economic outlook and will not be unduly rapid.
- Recent forward guidance by the Federal Reserve and the BOE about economic thresholds has set markets up for incremental adjustments as the economy makes progress, though thresholds may need to be reconsidered as recovery progresses.
- The Federal Reserve has defined key elements of its exit mechanics and revised its original plan as its balance sheet continued to grow.
- Broader communication on exiting UMP is useful, including:
  - guiding principles for asset sales;
  - a clear discussion of risks to the recovery from exiting too early versus risks to domestic and global financial stability from exiting too late.
- Risk trade-off: While communicating concerns could undermine market stability, insufficient communication risks creating market surprises.

### Tactical asset purchases and yield targeting
- If volatility and overshooting in bond yields are severe, tactical asset purchases could be used if prices stray too far from fundamentals.
- Limitations and risks of such interventions:
  - Effectiveness may be low unless long rates are substantially misaligned, which is difficult to determine.
  - Potentially high costs if continuous heavy intervention is needed.
  - Risk of market confusion if simultaneously tightening short-term rates and purchasing assets to hold down longer-term yields.
- Central banks have judged long-term yields and risk premia to be too high but have not specified a target yield level; introducing yield curve targets during exit would be difficult and likely delay market normalization.

### Historical evidence and lessons (Box 5)
- Selected past exits:
  - U.S. 1994: Fed increased short-term rates by 300 bps quickly from a historically low level; little forward guidance and a pronounced front-loaded reaction to tightening.
  - U.S. 2004–06: Fed tightened more gradually; more telegraphed approach and milder market reaction.
  - BOJ 2000: Began then aborted an exit from ZIRP; early exit in August 2000 raised call rate target from zero to 25 basis points, but recovery proved short lived and BOJ cut rates in February 2001 and engaged in QE in March 2001.
  - BOJ 2006: Exited QE by allowing short-term assets to roll off balance sheet as they matured; precisely communicated intentions, producing little bond market impact.
- Key lessons:
  - Communication is crucial to managing market impact; gradualism and clear telegraphing mitigate overshooting.
  - Exiting too early without clear criteria is risky when outlook is fragile and inflation is weak.
  - Tying pace of tightening and asset sales to economic and market conditions helps avoid disrupting markets; BOJ linked pace of equity sales to financial market conditions.
  - Unwinding is facilitated by short balance sheet maturity: BOJ shrank balance sheet by 20 percent in four months because many liquidity injections had built-in sunset clauses and most assets had maximum maturity of less than 150 days.
- Impact on financial markets from selected tightening cycles (Basis Point Change from Beginning of Tightening Cycle to Mid-cycle / Total):
  - Federal Reserve 1994 — 2-yr: 160 / 307; 10-yr: 127 / 189; 2—10 yrs: -34 / -119; Equity index: -6.5 percent; FX index: -2.7 percent
  - Federal Reserve 2004 — 2-yr: 82 / 237; 10-yr: -77 / 51; 2—10 yrs: -159 / -186; Equity index: 4.9 percent / 12.0 percent; FX index: -0.4 percent / -3.9 percent
  - Bank of Japan 2006 — 2-yr: -5 / 2; 10-yr: -14 / -15; 2—10 yrs: -9 / -17; Equity index: 10.0 percent / 20.7 percent; FX index: -1.3 percent / -5.2 percent

### Global spillovers, amplification mechanisms, and risks (Sections 30–33; Box 6)
- Expected international responses to UMP exit:
  - In UMP countries not exiting: expected short-term rates might rise due to business cycle correlations; risk premia might also rise, especially in countries with weak growth.
  - In non-UMP countries: currencies will depreciate and bond yields might rise if monetary policy is expected to tighten due to growth spillovers; term premia might rise due to repricing of risk or liquidity premia changes.
- Capital flow and asset price risks:
  - Some capital flow reversal and higher borrowing costs are to be expected.
  - Higher bond rates will induce portfolio rebalancing out of non-UMP countries; market imperfections can amplify shocks, especially in EMEs with large capital inflows.
  - Repricing of risk could induce runs by investors with speculative, highly leveraged positions using short-term funding.
  - Thin markets can amplify price movements and trigger sale spirals; foreign exchange exposure further amplifies movements as investors deleverage.
- Financial system amplification:
  - Non-performing loans may rise, capital buffers shrink, and funding can evaporate, undermining stability.
  - Contagion effects can broaden and amplify asset price movements and capital outflows; co-movement in capital flows was noticeably higher following announcements of Fed tapering than following earlier asset purchase announcements.
- Non-linear DSGE model illustration (Box 6):
  - An unexpected rise in foreign interest rates leads to currency depreciation, sharp asset price declines, decreased real incomes and wealth, and a jump in domestic currency value of foreign currency debt.
  - Consumption falls, debt rises, non-performing loans increase → banks’ capital falls → higher lending rates to avoid minimum capital breaches → downturn in lending further undermines consumption and investment, creating a vicious circle with sharp growth drop and spike in current account surplus.
  - Outcome is not inevitable; measures to limit foreign currency debt and strengthen the financial system can help.
- Model simulations considered two economies: one with high foreign exchange rate liabilities and one with low exposure; general dynamics emphasized over exact values due to limited data on large shocks.

### Exposure and resilience of non-UMP countries (Sections 33; Box 7)
- Definitions:
  - “Exposure” = likelihood of market volatility and capital outflows after tapering in UMP countries.
  - “Resilience” = ability to withstand market volatility and capital outflows.
- Measures of exposure used:
  - sovereign credit ratings (positively correlated with risk of capital outflows through contagion),
  - empirically estimated correlations of a country’s 10-year bond rates with those of the U.S. (estimated by regression on days of FOMC announcements using daily data from January 1, 2003 to May 20, 2013, with all variables in first differences),
  - cumulative changes of countries’ 10-year bond rates on days of Fed tapering announcements (May 22 and June 19, 2013),
  - extent of capital outflows following recent U.S. tapering announcements.
- Measures of resilience used:
  - domestic market conditions (composite of market size, turnover, and ability of domestic investment funds to supplant foreign investors),
  - reliance on foreign funding, especially of short-term maturity,
  - room for policy maneuver (decomposed into: room for currency depreciation relative to fundamentals; foreign exchange reserves to potentially stem excessive depreciation; appropriateness of higher interest rates relative to inflation and the output gap; room for fiscal policy to withstand higher funding costs and support the financial sector if necessary; and banking sector strength).
- Empirical assessment:
  - More developed non-UMP economies (Australia—higher resilience; Canada and Korea—lower exposure) and other EMEs with higher resilience and/or lower exposure are expected to fare relatively well following a U.S. exit.
  - Other countries appear more vulnerable due to higher exposure and lower resilience; some are borderline cases.

### Policy options for non-UMP countries facing spillovers (Section 34)
- General guidance: actions vary with country circumstances; proactively enhance fundamentals to increase policy maneuver room.
- Monetary policy and communication:
  - Central banks should rely on credibility and active communication to convince markets of focus on stable inflation and orderly markets.
  - Monetary policy response should be appropriate to the cyclical position to mitigate flight to quality and increases in risk premia.
  - Some countries may access central bank foreign exchange swap lines to cope with turbulence.
- Exchange rate and intervention:
  - Allow exchange rates to respond to changing fundamentals but guard against disorderly adjustment.
  - Some intervention to smooth volatility may be appropriate in countries with adequate reserves, but should not forestall necessary external adjustment where external deficits exceed fundamentals.
- Macro- and microprudential policies:
  - To the extent such policies were used to limit risks associated with inflows, they might be reversed only if doing so would not endanger financial stability.
  - Note: CFMs to restrain outflows should only be used in crisis or near-crisis conditions.

### International policy coordination and the role of the Fund (Sections 35–37)
- Rationale for coordination:
  - Given interconnectedness, spillovers are inescapable; what is good for a large AE is generally good for the rest of the world, but positive and negative spillovers can exist.
  - Coordination can potentially yield Pareto improvements when externalities are present and measurable and informational problems can be overcome.
  - Establishing a case for coordination requires identifying and measuring true externalities that affect economic welfare.
- When coordination may help:
  - UMP measures that support market functioning and financial intermediation typically have positive cross-border externalities; non-UMP countries benefited from policies that restored market functioning and financial stability.
  - UMP measures to support aggregate demand at the ZLB have raised global growth but may generate negative externalities if they lead to financial distortions and buildup of stability risks (e.g., excessive capital flows to non-UMP countries); coordination may be warranted in such cases.
- Open questions and research needs:
  - No consensus exists on size and sign of externalities from UMP use or exit, nor on the effects of measures (such as capital inflow controls) that non-UMP countries might take in response.
  - It is not known at what point positive effects of UMP on global growth are outweighed by financial stability risks.

*Source: IMF staff chapter excerpt on global impact and challenges of unconventional monetary policies.*

### 38.      Coordination, if warranted, would have several facets. UMP economies would be

### _090313 - 38.      Coordination, if warranted, would have several facets. UMP economies would be

### Coordination: facets and mechanisms
- UMP economies would be encouraged to alter their internal policy mix; needed structural, fiscal and banking sector reforms would allow UMP to be unwound earlier rather than later.
- Coordination would also involve reforms in non-UMP countries to foster rebalancing and strengthen conditions for sustainable medium-term growth.
- Coordination would include greater collaboration in adopting regulatory and macro-prudential policies designed to help other countries deal with problems they cause.
- Collaboration would be beneficial in preparing the terrain for exit, for instance by:
  - setting up foreign exchange swap lines, and
  - providing other central banks with sufficient advanced warning on exit prospects.
- The 2013 Spillover Report (IMF 2013d, Box 1) argues that a different policy mix could raise global growth, with global GDP about 3 percent higher than in the baseline after 10 years.

### Incentives required to achieve coordination
- Two key incentives are needed:
  - countries must see clear and visible medium-term net benefits from coordination, and
  - UMP might be conditioned on the implementation of other needed reforms.
- Neither incentive is fully in place:
  - There is little prospect that central banks will seek to impose conditions for their liquidity assistance on governments, except possibly for OMT.
  - Central banks may be able to impose conditions on banks to speed up their repair and reform.

### The Fund’s role: surveillance, analysis, and lending
- The Fund stands ready to support the membership in navigating UMP and its exit and to help strengthen incentives for coordination.
- Fund surveillance and multilateral products provide a global perspective on the two main issues associated with UMP policies: prospects for growth and for financial stability. These include:
  - World Economic Outlook,
  - Global Financial Stability Report,
  - the Fund’s new surveillance framework for integrated analysis of policy spillovers,
  - Spillovers and External Sector Assessments.
- Fund lending facilities and instruments that can help prevent or alleviate risks from UMP include:
  - Flexible Credit Line (useful for building policy buffers),
  - more traditional Fund lending arrangements to alleviate balance of payments problems,
  - technical assistance to support domestic policy implementation (e.g., macroprudential policies).
- Policy buffers and tools to minimize damaging side effects include exchange rate flexibility, macroprudential policies, reserves, and swap lines.

### Fund analysis to facilitate cooperation
- Fund analysis can:
  - provide an independent and rigorous approach to exploring spillover effects—both positive and negative,
  - suggest areas where policy cooperation might usefully be explored,
  - provide a global perspective to other forums where policy cooperation is on the agenda.
- Example: In the G-20 Mutual Assessment Process, thematic annexes on key multilateral policy issues could further enhance dialogue on achieving rapid and sustainable global growth.

### Appendix — selected literature: key empirical findings (selected entries)
- Chen, Filardo, He, and Zhu (1995-2012): U.S. quantitative easing stimulated the U.S. domestic economy, boosted asset prices globally, and affected real GDP, inflation, stock prices, bank credit, foreign exchange pressure and money growth.
- Chinn (2008M09-2013M03): An increase in the money-base/GDP ratio weakens the dollar at horizons of two to three months.
- Bauer and Neely (1995-2009): Signaling effects were significant in the U.S. and Canada; portfolio balance effects were more important in Australia and Germany; Japan saw absent signaling effects and modest PB effects.
- Moore, Nam, Suh, and Tepper (2004-2010): U.S. LSAPs increased portfolio flows into many emerging market economies; a 10 basis point decrease in the U.S. 10-year Treasury yield pushes up the foreign share in government bond markets of the EM countries in the sample by an average of 0.4 percentage points, which in turn causes their government bond yields to fall by roughly 1.7 basis points.
- Neely (November 2008-January 2010 and November 2008-January 2013 intraday): A one standard deviation surprise easing in unconventional policy leads to a roughly 40 basis point (bp) decline in the value of the dollar within 60 minutes; Fed measures in the early phase (QE1) boosted bond and equity prices and led to U.S. dollar appreciation, while QE2 boosted equity prices worldwide and led to U.S. dollar depreciation; Fed policies were pro-cyclical for capital flows to EMEs in QE1 and counter-cyclical for the U.S. in QE2.

*Source: _090313 - 38.      Coordination, if warranted, would have several facets. UMP economies would be — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_090313.pdf_