IMF Survey : Lagarde: Monetary Policies Have Bought Time—Use It Wisely
IMF News, August 23, 2013
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- Published: August 23, 2013
Overview and context
- Publication date: August 23, 2013
- Main message: Unconventional monetary policies (UMP) implemented by central banks have bought policymakers time and space to implement reforms needed for lasting growth; policymakers should “use this time wisely.”
- Venue: Jackson Hole Economic Symposium
Impact on the global economy
- IMF assessment: The impact of unconventional monetary policies so far has been positive.
- Sequence of benefits: First, lessened risks of financial turmoil; then, increased growth.
- Quantitative estimate: Quantitative easing, the purchase of assets by the U.S. Federal Reserve, “boosted world output by more than 1 percent.”
- Timing of exit: “There should be ‘no rush to exit,’” but the period of exceptionally loose monetary policy must eventually end; timing “will and should depend on the pace of recovery.”
- Country-specific outlook: “In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan, too, exit is very likely some way off.”
Uncharted territory: considerations for exit
- Overarching point: Exit from UMP will take the world into uncharted territory; “the Fund and policymakers need to start thinking about what exit will eventually look like.”
- Balance of stability and risk taking:
- Long periods of very loose monetary policy and ultra-low interest rates mixed with the hunt for higher yields could foster unhealthy risk-taking.
- Conversely, without UMP the result might have been lower growth and greater risk of financial distress.
- Spillovers:
- The IMF is examining spillover effects such as episodes of rising capital flows, increases in asset prices, corporate leverage, and foreign exchange exposure in some emerging market countries following UMP initiation.
- Need to remain alert to risks of renewed financial instability; “the situation can turn quickly—as we have seen in recent days in some emerging market economies.”
- Difficulty noted in disentangling UMP effects from other factors; “Not everyone agrees about the size, or even direction, of spillovers. Bridging or even narrowing these differences is an important step toward deciding the future course of policy.”
- Sequencing of exit:
- Important to define what is meant by “exit”; conventional and unconventional policies are often lumped together.
- Exit will involve reversing both, but more “conventional” aspects (such as guidance on the future path of policy rates or the rate of future asset purchases) are likely to be done first.
- As a result, “exit is likely to be slower and longer than is often portrayed, and feared.”
- Clear communication:
- Central banks must communicate the risks to recovery from exiting too soon and the risks to financial stability from exiting too late.
- Even if well managed, exit from UMP “may well present other, non-UMP countries with an arduous obstacle course.”
- Tools available to other countries include macro and micro prudential measures, capital flow management measures, and exchange rate flexibility.
Policy mix and recommendations
- Monetary policy limits: While monetary policy has been part of the solution, “it cannot provide all the answers.”
- Need for complementary policies:
- Advanced economies pursuing UMP must make progress on medium-term fiscal, financial, and structural reforms.
- Other countries also need deeper reforms for durable medium-term growth, in light of concerns about slowing growth potential of emerging markets.
- Coordination imperative:
- “Policies and policy coordination are not yet where they need to be.”
- Failing to act collectively could put the global recovery at risk; coordinated action can place the world economy on a path of “strong, sustainable, and balanced growth.”
- “We all need to work better together,” since spillovers from domestic policies “may well feed back to where they began.”
Source: IMF Survey — Lagarde speech at the Jackson Hole Economic Symposium (August 23, 2013).