New Policy Frameworks for a Lower-for-Longer World

IMF News, November 24, 2020

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Opening Remarks by Kristalina Georgieva, IMF Managing Director.
Date: November 24, 2020.
Purpose: Policy dialogue on the consequences of ‘lower for longer’ interest rates around the world and on reviewing central bank frameworks and tools to support recovery from the COVID-19 crisis and beyond.
Panel: Richard Clarida, Philip Lane, Tobias Adrian; moderator Carolyn Wilkins.
Noted research: Tobias Adrian’s new paper arguing that easier financial conditions today could encourage excessive risk-taking.

Central banks took forceful and timely actions during COVID-19, providing ample liquidity and easing monetary policy to maintain credit flow and avert financial catastrophe.
Even before COVID-19, central banks struggled to boost economic activity and keep inflation at desired levels.
Policies deployed over the preceding decade included promises to keep policy rates very low and large-scale asset purchases; these helped spur one of the strongest employment expansions in history that benefited many lower-skilled and minority workers.
The abrupt collapse in activity from COVID-19 brought unemployment back into focus and added risks of skill deterioration and an increase in poverty, putting pressure on central banks to deliver more rate cuts and further accommodation.
Many policy rates have been pushed to the floor, or below zero; even very long-term government bond yields are extremely low or negative, limiting the scope for government debt purchases to boost the economy.
Many emerging markets face the same challenges with more limited room to cut interest rates; earlier in the year many of them tried asset purchases for the first time.

New strategies and tools may speed recovery but may also produce new side effects, including important risks to financial stability.
Traditional mitigation is financial regulation and macroprudential tools, but these may not be sufficient.
Monetary policymakers face a tradeoff: a short-term boost to inflation and output versus a buildup of macro-financial vulnerabilities through excessive risk-taking.

Central banks must be innovative and bold in renewing their frameworks and updating their toolkits to gain new ammunition to fight the crisis and support the recovery.
Monetary policy should not and cannot do the job alone.
Fiscal policy has a significant role to play: policymakers have stepped up fiscal support during the crisis and need to continue to do so to underpin a sustainable and inclusive recovery.
Use of financial regulation and macroprudential tools remains important to mitigate financial-stability risks arising from easier financial conditions.

The IMF supports efforts to find the right policy tools and approaches to stimulate economies while managing the risks.
Objective: help members overcome the crisis, restore growth and confidence, and tackle challenges on the road to a more resilient global economy.
Emphasis on shielding millions of people from job losses and a prolonged downturn during the “long ascent” out of the crisis.

Opening Remarks by Kristalina Georgieva, IMF Managing Director — November 24, 2020