IMF Survey : Top Researchers Debate Unconventional Monetary Policies
IMF News, November 20, 2015
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Bibliographic details
- Authors: Maurice Obstfeld, Gustavo Adler IMF Research Department November
- Published: November 20, 2015
Conference overview
- Publication date: November 20, 2015
- Event: The Sixteenth Jacques Polak Annual Research Conference, hosted by the IMF at its Washington, D.C., headquarters on November 5 and 6.
- Purpose: Gathered researchers to discuss lessons and the future of unconventional monetary policies adopted since the global financial crisis.
Effects on asset prices and the real economy
- Findings:
- Quantitative easing worked but had no striking effects on the real economy.
- Presentations suggested unconventional monetary policies had a visible impact on asset prices and some effects on the real economy, although of limited magnitude.
- Evidence presented:
- John Rogers (Federal Reserve Board): U.S. monetary policy easing significantly lowers term premiums on domestic and foreign bonds and foreign exchange risk premiums, indicating the relevance of the portfolio balance channel.
- Dietrich Domanski (Bank for International Settlements): Portfolio adjustments by long-term investors (insurers and pension funds) to contain duration mismatches may have amplified effects of unconventional policies.
- Dora Xia (Merrill Lynch): Using a shadow interest rate definition, unconventional monetary policies successfully loosened monetary policy and stimulated the real economy in the United States.
- Eric Engen and David Reifschneider (Federal Reserve Board): Found a non-negligible effect on unemployment via altered private perceptions of policy response, but slow adjustment in expectations limited the impact on real activity and inflation.
- Tim Eisert (Erasmus University Rotterdam): ECB asset purchase program raised value of banks’ sovereign debt holdings, improving bank health and increasing loans to corporates—resulted in a buildup of cash reserves but no visible improvement in employment or investment.
Zero lower bound and "lift off"
- Key point:
- Discussion on how to lift off from the zero lower bound when economic strength is highly uncertain.
- Evidence:
- David Lopez-Salido (Federal Reserve Board): When information is incomplete, the optimal policy rate may remain at the zero lower bound even when positive signals about the equilibrium real rate would otherwise call for an increase.
Monetary–fiscal policy interactions
- Presentations and perspectives:
- Pierpaolo Benigno: Explored unconventional policies’ impact on central bank capital and the role of treasury support.
- Adair Turner (Institute for New Economic Thinking): Argued for using monetary financing of fiscal deficits to stimulate aggregate nominal demand and discussed rules to prevent misuse.
- Ricardo Reis (Columbia University and LSE): Examined how quantitative easing could stabilize at the onset of fiscal crises by reducing inflation’s sensitivity to fiscal shocks and shifting sovereign risk away from banks’ balance sheets.
International dimensions and spillovers
- Ben Bernanke (Mundell-Fleming Lecture):
- Downplayed concerns about “currency wars,” arguing demand-diverting and demand-augmenting effects largely offset each other.
- Argued there is not yet a compelling case for altering U.S. monetary policy because of spillovers, though he supported increased international cooperation in financial regulation and consultation on monetary policy.
- Other contributions:
- Joseph Gagnon (Peterson Institute): Official purchases of foreign assets and foreign reserve stocks can have sizable effects on a country’s current account, especially when the capital account is closed; domestic-asset purchases typical of QE involve no such effects.
- Feng Zhu (Bank for International Settlements): Argued monetary policies in the United States and the euro area affect one another with asymmetric magnitudes and asymmetric effects on third countries.
- Tomasz Wieladek (Bank of England): Highlighted “deglobalization” in cross-border bank lending in the United Kingdom and argued domestic-supportive unconventional policies may unintentionally reduce cross-border lending.
Suitability for emerging market economies
- Roberto Chang (Rutgers University): Theoretical analysis of unconventional policies used by emerging market economies, including direct lending to the private sector, liquidity facilities, bank equity purchases, and sterilized foreign exchange operations.
Panel debate — divergent views
- Adam Posen (Peterson Institute):
- Argued against calling balance sheet expansion/contraction “unconventional.”
- Stated that central bank balance sheets can be used in normal times to influence monetary conditions and that QE will not necessarily lead to uncontrolled inflation.
- Emphasized monetary stimulus cannot fully substitute for fiscal policy.
- Paul Krugman (City University of New York):
- Contended unconventional policies were not a game changer and produced less than hoped positive effects.
- Argued highly accommodative monetary policy does not induce financial instability.
- Claudio Borio (Bank for International Settlements):
- Warned against overburdening monetary policy and stressed asymmetric monetary conduct over the financial cycle.
- Argued weak effects of unconventional policies are unsurprising due to impaired balance sheets after crises.
- Highlighted the risk of a debt trap and stressed need for balance-sheet repair with fiscal support and structural policies to boost sustainable output growth.
- Lael Brainard (Federal Reserve Governor):
- Contended preliminary evidence suggests unconventional policies are effective in overcoming zero lower bound constraints.
- Challenged the view that unconventional actions have fundamentally distinctive spillover effects, arguing they work through the same channels and in similar magnitudes as conventional policies.
- Suggested strong negative political reactions to U.S. unconventional announcements reflected discontinuity around the zero lower bound and greater uncertainty about the Federal Reserve policy reaction function.
Conclusion — what now?
- Synthesis:
- Extraordinary measures prevented a greater recession, and arguably a depression, in 2008-09.
- A consensus may be emerging on the limits of what monetary policy (conventional and unconventional) can achieve: these measures needed support from fiscal policy and balance-sheet repair.
- Financial stability implications and spillovers remain unresolved; further research is needed to fully understand the policy toolkit.
- Notable quotation: Paraphrasing Adam Posen—these “over-the-counter remedies” needed support from the stronger “prescription medicines” of fiscal policy and balance-sheet repair.
Source: IMF Research Department, IMF Survey : Top Researchers Debate Unconventional Monetary Policies, November 20, 2015.