{
  "title": "What to do When Low-for-Long Interest Rates are Lower and for Longer",
  "publication": "IMF Blog, December 14, 2020",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2020/12/14/what-to-do-when-low-for-long-interest-rates-are-lower-and-for-longer",
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  "summary": "Author: Tobias Adrian",
  "sections": [
    {
      "heading": "Context and key messages",
      "content": "- Author: Tobias Adrian\n- Date: December 14, 2020\n- Central banks have been pivotal in easing financial conditions in response to the COVID-19 shock and helped avert a catastrophic downturn.\n- More monetary stimulus will be needed to support economic recovery; central banks are implementing innovative new strategies to provide it.\n- Policymakers must weigh the pros of more stimulus today against the cons of higher financial stability risks in the future.\n- A model is presented to quantify the tradeoff between near-term support and increased vulnerability tomorrow."
    },
    {
      "heading": "New strategies for a lower-for-longer environment",
      "content": "- Pre-pandemic challenges:\n  - Central banks struggled to boost economic activity and bring inflation to target even after the Global Financial Crisis.\n  - A sharp decline in the neutral rate of interest reduced scope to counter low inflationary pressures.\n  - Even with very low yields out the yield curve, inflation remained chronically low and appeared to be pulling down long-run inflation expectations in many economies, putting downward pressure on nominal yields and eroding policy space.\n- COVID-19 intensified these challenges:\n  - Employment collapsed, threatening a major humanitarian crisis in many economies.\n  - Inflation was further depressed by weak activity and falling commodity prices.\n  - Policy rates have been pushed to zero or below; very low yields on long-term government bonds limit scope for stimulus via purchases of these instruments.\n- Recent institutional responses:\n  - Central banks are conducting monetary policy framework reviews to identify new ways to boost employment and inflation.\n  - The Federal Reserve adopted a “make-up” strategy to allow inflation to overshoot its target to make up for past shortfalls, aiming to better anchor inflation expectations and create optimism today that fuels a stronger recovery."
    },
    {
      "heading": "Financial stability tradeoffs and the risk-taking channel",
      "content": "- Unconventional policies under consideration:\n  - More aggressive use of sovereign bond and corporate debt purchases, combined with new approaches, can speed recovery from COVID-19 and future shocks.\n- Risks:\n  - Even more accommodative policies may encourage excessive risk-taking and a build-up of vulnerabilities that pose substantial future risks.\n- Role of macroprudential policy:\n  - Ideally, macroprudential policies should be the first line of defense against financial stability risks, consistent with Fund policy advice.\n  - In practice, macroprudential tools may fall short due to lack of tools for nonbank financial institutions or implementation hurdles tied to the political process.\n- Modeling the tradeoff:\n  - A “New Keynesian” modeling framework is presented that incorporates a risk-taking mechanism:\n    - Easy monetary policy stimulates aggregate demand through standard channels and by relaxing financial conditions via risk-taking.\n    - Looser monetary policy reduces near-term risks to output and financial stability but causes financial fragilities to grow over time, increasing output risk in the medium term.\n  - The framework helps policymakers balance the intertemporal tradeoff associated with “low-for-long” monetary policies, including those deployed in response to COVID-19.\n- Cross-border considerations:\n  - Monetary policy easing by major central banks can affect financial stability in foreign economies through increased risk-taking and a buildup of leverage.\n  - The IMF’s integrated policy framework—considering macroprudential policies, capital flow management tools, and foreign exchange intervention—can be constructive in assessing mitigation strategies."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Continue bold and innovative strategies to provide additional firepower to support faster global recovery and achieve inflation targets.\n- Incorporate macro-financial stability considerations explicitly into monetary policy decision making, alongside output, unemployment, and inflation objectives.\n- Actively deploy macroprudential tools where possible to contain financial stability risks, enabling more prolonged monetary accommodation and promoting faster recovery.\n- Be vigilant in managing the future financial-stability consequences of accommodative policies and make those future consequences a key part of present decision making.\n- Consider international spillover effects and use an integrated policy toolkit to mitigate cross-border financial stability risks.\n\nSource: IMF Blog post by Tobias Adrian, December 14, 2020. The IMF is an organization of 191 countries.\n\n---\n\n\n References\n\n- new paper\n- central banks were struggling to boost economic activity and bring inflation to target\n- New Policy Frameworks for a “Lower-for-Longer” World\n- consistent with Fund policy advice\n- integrated policy framework\n\nSource: https://www.imf.org/en/blogs/articles/2020/12/14/what-to-do-when-low-for-long-interest-rates-are-lower-and-for-longer"
    }
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    "Authors: Tobias Adrian",
    "Published: December 14, 2020",
    "Author: Tobias Adrian",
    "Date: December 14, 2020",
    "Central banks have been pivotal in easing financial conditions in response to the COVID-19 shock and helped avert a catastrophic downturn.",
    "More monetary stimulus will be needed to support economic recovery; central banks are implementing innovative new strategies to provide it.",
    "Policymakers must weigh the pros of more stimulus today against the cons of higher financial stability risks in the future.",
    "A model is presented to quantify the tradeoff between near-term support and increased vulnerability tomorrow.",
    "Pre-pandemic challenges:",
    "COVID-19 intensified these challenges:",
    "Recent institutional responses:",
    "Unconventional policies under consideration:",
    "Risks:",
    "Role of macroprudential policy:",
    "Modeling the tradeoff:",
    "Cross-border considerations:",
    "Continue bold and innovative strategies to provide additional firepower to support faster global recovery and achieve inflation targets.",
    "Incorporate macro-financial stability considerations explicitly into monetary policy decision making, alongside output, unemployment, and inflation objectives.",
    "Actively deploy macroprudential tools where possible to contain financial stability risks, enabling more prolonged monetary accommodation and promoting faster recovery.",
    "Be vigilant in managing the future financial-stability consequences of accommodative policies and make those future consequences a key part of present decision making.",
    "Consider international spillover effects and use an integrated policy toolkit to mitigate cross-border financial stability risks.",
    "[new paper](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2020/11/23/Low-for-Long-and-Risk-Taking-49733)",
    "[central banks were struggling to boost economic activity and bring inflation to target](https://www.imf.org/en/News/Articles/2020/11/24/sp112420-new-policy-frameworks-for-a-lower-for-longer-world)",
    "[New Policy Frameworks for a “Lower-for-Longer” World](https://www.imf.org/en/News/Seminars/Conferences/2020/11/24/new-policy-frameworks-for-a-lower-for-longer-world)",
    "[consistent with Fund policy advice](https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Monetary-Policy-and-Financial-Stability-PP4982)",
    "[integrated policy framework](https://blogs.imf.org/2020/12/09/navigating-capital-flows-an-integrated-approach/)"
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