{ "title": "Monetary Policy Will Never Be the Same", "publication": "IMF Blog, November 19, 2013", "sourceUrl": "https://www.imf.org/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same", "canonical": "https://www.imf.org/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same", "overlayPath": "/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same/index.md", "summary": "Author: Olivier Blanchard", "sections": [ { "heading": "Overview and context", "content": "- Author: Olivier Blanchard\n- Date: November 19, 2013\n- Context: Reflections following an IMF research conference in honor of Stanley Fischer on lessons from the crisis.\n- Two preliminary non-monetary policy conclusions highlighted:\n - Having your macro house in order pays off in an external crisis; prudent pre-crisis fiscal policy gave emerging market countries room to pursue countercyclical fiscal policies during the crisis.\n - Rapid cleanup and recapitalization of banks after a financial crisis is essential; the US recapitalization helped recovery, whereas Japan’s failure to do so in the 1990s was costly." }, { "heading": "Liquidity trap: evidence and implications", "content": "- Key observations:\n - The zero lower bound can be binding and persist for a long period — \"five years at this point.\"\n - Unconventional monetary policy can systematically affect term premia and bend the yield curve through portfolio effects.\n - Compared to conventional policy, the effects of unconventional monetary policy are \"very limited and uncertain.\"\n- Counterfactual / quantitative illustration:\n - If inflation had been \"2 percentage points higher\" before the crisis:\n - The best guess is inflation would be \"2 percentage points higher today.\"\n - The real rate would be \"2 percentage points lower.\"\n - The United States would \"probably be close ... to an exit from zero nominal rates today.\"\n- Risks and scenarios:\n - Possibility (as raised by Larry Summers) that economies may need \"negative real rates for a long time.\"\n - Negative real rates can be achieved through \"low nominal rates and moderate inflation.\"\n - Current danger: an adverse feedback loop where depressed demand → lower inflation → higher real rates → even more depressed demand." }, { "heading": "Liquidity provision: lender of last resort and sovereign risks", "content": "- Lessons:\n - Runs are relevant not only for banks but also for other financial institutions and for governments.\n - In an environment of high public debt, rollover risks cannot be excluded.\n- Policy implication:\n - Essential to have a lender of last resort ready to lend not only to financial institutions but also to governments (theme emphasized by Paul Krugman).\n- Supporting evidence:\n - The behavior of periphery sovereign bonds in the Euro area, before and after the European Central Bank’s announcement of outright monetary transactions, supports the importance of a lender of last resort." }, { "heading": "Capital flows and exchange rate policy in emerging markets", "content": "- Preferred broad approach:\n - Let the exchange rate absorb most—but not necessarily all—of the adjustment to volatile capital flows.\n - Standard argument (stated by Paul Krugman): if investors withdraw funds, allow them to exit; depreciation will likely increase exports and output.\n- Traditional counterarguments against relying on exchange rate adjustment:\n 1. Depreciation can harm domestic balance sheets where borrowers have foreign-currency debt, reducing domestic demand possibly offsetting export gains.\n 2. Nominal depreciation may translate into higher inflation.\n 3. Large exchange rate movements may disrupt the real economy and financial markets.\n- Empirical reassessment based on recent crisis experience:\n - The first two concerns are \"much less relevant than they were in previous crises\" because of:\n - Macroprudential measures.\n - Development of local currency bond markets.\n - Exchange rate flexibility improving borrowers' perception of exchange rate risk, reducing foreign exchange exposure.\n - Increased credibility of monetary policy and inflation targets, better anchoring inflation expectations and limiting pass-through of exchange rate movements to inflation.\n - The third concern (disruptions from large exchange rate movements) remains relevant.\n- Policy practice and tools:\n - Many emerging market central banks use a \"managed float\" rather than full float:\n - Joint use of the policy rate, foreign exchange intervention, macroprudential measures, and capital controls.\n - Rationale:\n - Avoids the dilemma where the policy rate is the sole instrument: raising the policy rate to counter capital inflows can itself attract more foreign investment.\n - Foreign exchange intervention, capital controls, and macroprudential tools can, in principle, limit exchange rate movements and financial disruptions without relying solely on the policy rate.\n - Experience during the crisis:\n - Countries employed combinations of these tools; some relied more on capital controls, others more on foreign exchange intervention.\n - Evidence from the conference and IMF work suggests these tools have \"worked, if not perfectly.\"\n- Research and policy challenge:\n - The \"clear (and quite formidable) challenge\" is to understand how best to combine these tools going forward." }, { "heading": "Conclusions and research agenda", "content": "- Core conclusion: \"Monetary policy will never be the same after the crisis.\"\n- The conference clarified how monetary policy has changed and identified focal points for future research and policy:\n - Preventing and mitigating liquidity traps, including rethinking inflation targets and the role of negative real rates.\n - Strengthening frameworks for liquidity provision, including lender-of-last-resort capacity for sovereigns.\n - Refining the use and combination of policy rate, foreign exchange intervention, macroprudential measures, and capital controls to manage volatile capital flows while limiting disruptions.\n\nOlivier Blanchard — \"Monetary Policy Will Never Be the Same,\" November 19, 2013.\n\n---\n\n Content in this bundle\n\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Currency Regimes, Capital Flows, and Crises\n - Currency Regimes, Capital Flows, and Crises (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Currency Regimes, Capital Flows, and Crises (PDF){rel=\"external\" type=\"application/pdf\"}\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 14th Jacques Polak Annual Research Conference; November 7–8, 2013\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - 14th Jacques Polak Annual Research Conference; November 7–8, 2013 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- research conference\n- emerging market countries\n\nSource: https://www.imf.org/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same" } ], "bullets": [ "[Markdown version](/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same/index.md)", "[Structured JSON version](/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same/index.json)", "[Bundle manifest](/en/blogs/articles/2013/11/19/monetary-policy-will-never-be-the-same/bundle-manifest.json)", "Authors: Olivier Blanchard", "Published: November 19, 2013", "Author: Olivier Blanchard", "Date: November 19, 2013", "Context: Reflections following an IMF research conference in honor of Stanley Fischer on lessons from the crisis.", "Two preliminary non-monetary policy conclusions highlighted:", "Key observations:", "Counterfactual / quantitative illustration:", "Risks and scenarios:", "Lessons:", "Policy implication:", "Supporting evidence:", "Preferred broad approach:", "Traditional counterarguments against relying on exchange rate adjustment:", "Empirical reassessment based on recent crisis experience:", "Policy practice and tools:", "Research and policy challenge:", "Core conclusion: \"Monetary policy will never be the same after the crisis.\"", "The conference clarified how monetary policy has changed and identified focal points for future research and policy:", "**14th Jacques Polak Annual Research Conference; 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