Lagarde: The IMF is looking at the spillover effects on other countries (photo: Yuri Gripas/Reuters/Corbis)
Jackson Hole Speech
These policies—such as the purchase of assets by central banks to support financial stability and boost activity—have allowed the global economy to lift itself out of the depths of the financial crisis. Lagarde called for policymakers to “use this time wisely,” emphasizing two points.
First, the need for policymakers to work better together to take into account more fully the impact of these unconventional policies—local and global—and how that affects the path of exit. Second, that “all policymakers, within countries and across countries—have a responsibility to take the full range of actions needed to restore growth and stability.”
Impact on global economy
The IMF’s assessment is that the impact of unconventional monetary policies (UMP) so far has been positive, Lagarde said. On balance, all countries benefited, first from lessened risks of financial turmoil, then from increased growth.
Estimates suggest that quantitative easing, the purchase of assets by the U.S. Federal Reserve, boosted world output by more than 1 percent. Although the major gains were in the early phases, unconventional monetary policy has been a success, she said.
While emphasizing that there should be “no rush to exit,” Lagarde said that the period of exceptionally loose monetary policy must eventually end. But when exactly this happens will depend on country circumstances. “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,” she said.
“One thing we can say for certain: The path to exit will and should depend on the pace of recovery,” Lagarde added.
Uncharted territory
Just as for entry, exit from unconventional monetary policies will take the world into uncharted territory, said Lagarde. “Therefore, the Fund and policymakers need to start thinking about what exit will eventually look like.” The IMF Managing Director highlighted a few aspects:
Balance of stability and risk taking: One focus of the IMF’s work is on how best to balance the need for stability and risk-taking. On the one hand, Lagarde said, long periods of very loose monetary policy and ultra-low interest rates mixed with the hunt for higher yields could prove to be a recipe for unhealthy risk-taking. On the other hand, if unconventional monetary policies had not been implemented, the result might have been lower growth and greater risk of financial distress.
Spillovers: The IMF is also looking at the spillover effects on other countries, Lagarde said, such as the episodes of rising capital flows as well as increases in asset prices, corporate leverage, and foreign exchange exposure seen in some emerging market countries following the initiation of unconventional monetary policies. She stressed the need to be alert to the risks of renewed financial instability going forward, adding that “the situation can turn quickly—as we have seen in recent days in some emerging market economies.”
However, she also noted the difficulty of disentangling the effects of unconventional monetary policy from other factors affecting economic outcomes. “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,” Lagarde said.
Sequencing of exit: It will be important to define exactly what is meant by exit, Lagarde observed, as conventional and unconventional monetary policies are often lumped together. Exit will involve reversing both, yet it is likely that the more “conventional” aspects (such as guidance on the future path of policy rates or the rate of future asset purchases) will be done first. As a result, “exit is likely to be slower and longer than is often portrayed, and feared,” Lagarde said.
Clear communication: It is also imperative that central banks communicate clearly “the risks to recovery from exiting too soon and the risks to financial stability from exiting too late,” Lagarde said. “Even if well managed, exit from UMP may well present other, non-UMP countries with an arduous obstacle course.” But they have the tools to deal with it, she said, referring to the use of macro and micro prudential measures, capital flow management measures, and exchange rate flexibility.
A better mix of policies
While monetary policy has been part of the solution to the ongoing crisis, “it cannot provide all the answers,” Lagarde said. Unconventional policies need to be complemented by a broader spectrum of policies needed for durable, balanced growth. She also warned that the hard work of central banks could be wasted if not enough is done on other fronts.
In the advanced economies pursuing unconventional monetary policies, this means making progress on medium-term fiscal, financial, and structural reforms.
In the other countries, deeper reforms are also needed for durable medium-term growth, a reality highlighted by recent concerns about the slowing growth potential of emerging markets.
Coordination can improve outcomes
“Policies and policy coordination are not yet where they need to be,” Lagarde observed. “Failing to act at the global level, with each country playing its part, could put the global recovery at risk. With action, however, we can place the world economy on a path of strong, sustainable, and balanced growth.”
“We all need to work better together,” Lagarde said. “In today’s interconnected world, the spillovers from domestic policies—unconventional monetary policy included—may well feed back to where they began,” she added, noting that looking at the wider interest is thus in everyone’s interest.
The annual Jackson Hole Economic Symposium, held at a mountain resort in the western U.S. state of Wyoming, brings together central bankers, policy experts, and academics to focus on emerging issues and trends. This year’s topic is the global dimensions of unconventional monetary policy.
