## IMF Survey : Top Researchers Debate Unconventional Monetary Policies

_IMF News, November 20, 2015_

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## Bibliographic details
- Authors: Maurice Obstfeld, Gustavo Adler IMF Research Department November
- Published: November 20, 2015

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### Conference overview
- Publication date: November 20, 2015
- Event: The Sixteenth Jacques Polak Annual Research Conference, hosted by the IMF at its Washington, D.C., headquarters on November 5 and 6.
- Purpose: Gathered researchers to discuss lessons and the future of unconventional monetary policies adopted since the global financial crisis.

### Effects on asset prices and the real economy
- Findings:
  - Quantitative easing worked but had no striking effects on the real economy.
  - Presentations suggested unconventional monetary policies had a visible impact on asset prices and some effects on the real economy, although of limited magnitude.
- Evidence presented:
  - John Rogers (Federal Reserve Board): U.S. monetary policy easing significantly lowers term premiums on domestic and foreign bonds and foreign exchange risk premiums, indicating the relevance of the portfolio balance channel.
  - Dietrich Domanski (Bank for International Settlements): Portfolio adjustments by long-term investors (insurers and pension funds) to contain duration mismatches may have amplified effects of unconventional policies.
  - Dora Xia (Merrill Lynch): Using a shadow interest rate definition, unconventional monetary policies successfully loosened monetary policy and stimulated the real economy in the United States.
  - Eric Engen and David Reifschneider (Federal Reserve Board): Found a non-negligible effect on unemployment via altered private perceptions of policy response, but slow adjustment in expectations limited the impact on real activity and inflation.
  - Tim Eisert (Erasmus University Rotterdam): ECB asset purchase program raised value of banks’ sovereign debt holdings, improving bank health and increasing loans to corporates—resulted in a buildup of cash reserves but no visible improvement in employment or investment.

### Zero lower bound and "lift off"
- Key point:
  - Discussion on how to lift off from the zero lower bound when economic strength is highly uncertain.
- Evidence:
  - David Lopez-Salido (Federal Reserve Board): When information is incomplete, the optimal policy rate may remain at the zero lower bound even when positive signals about the equilibrium real rate would otherwise call for an increase.

### Monetary–fiscal policy interactions
- Presentations and perspectives:
  - Pierpaolo Benigno: Explored unconventional policies’ impact on central bank capital and the role of treasury support.
  - Adair Turner (Institute for New Economic Thinking): Argued for using monetary financing of fiscal deficits to stimulate aggregate nominal demand and discussed rules to prevent misuse.
  - Ricardo Reis (Columbia University and LSE): Examined how quantitative easing could stabilize at the onset of fiscal crises by reducing inflation’s sensitivity to fiscal shocks and shifting sovereign risk away from banks’ balance sheets.

### International dimensions and spillovers
- Ben Bernanke (Mundell-Fleming Lecture): 
  - Downplayed concerns about “currency wars,” arguing demand-diverting and demand-augmenting effects largely offset each other.
  - Argued there is not yet a compelling case for altering U.S. monetary policy because of spillovers, though he supported increased international cooperation in financial regulation and consultation on monetary policy.
- Other contributions:
  - Joseph Gagnon (Peterson Institute): Official purchases of foreign assets and foreign reserve stocks can have sizable effects on a country’s current account, especially when the capital account is closed; domestic-asset purchases typical of QE involve no such effects.
  - Feng Zhu (Bank for International Settlements): Argued monetary policies in the United States and the euro area affect one another with asymmetric magnitudes and asymmetric effects on third countries.
  - Tomasz Wieladek (Bank of England): Highlighted “deglobalization” in cross-border bank lending in the United Kingdom and argued domestic-supportive unconventional policies may unintentionally reduce cross-border lending.

### Suitability for emerging market economies
- Roberto Chang (Rutgers University): Theoretical analysis of unconventional policies used by emerging market economies, including direct lending to the private sector, liquidity facilities, bank equity purchases, and sterilized foreign exchange operations.

### Panel debate — divergent views
- Adam Posen (Peterson Institute): 
  - Argued against calling balance sheet expansion/contraction “unconventional.”
  - Stated that central bank balance sheets can be used in normal times to influence monetary conditions and that QE will not necessarily lead to uncontrolled inflation.
  - Emphasized monetary stimulus cannot fully substitute for fiscal policy.
- Paul Krugman (City University of New York): 
  - Contended unconventional policies were not a game changer and produced less than hoped positive effects.
  - Argued highly accommodative monetary policy does not induce financial instability.
- Claudio Borio (Bank for International Settlements): 
  - Warned against overburdening monetary policy and stressed asymmetric monetary conduct over the financial cycle.
  - Argued weak effects of unconventional policies are unsurprising due to impaired balance sheets after crises.
  - Highlighted the risk of a debt trap and stressed need for balance-sheet repair with fiscal support and structural policies to boost sustainable output growth.
- Lael Brainard (Federal Reserve Governor): 
  - Contended preliminary evidence suggests unconventional policies are effective in overcoming zero lower bound constraints.
  - Challenged the view that unconventional actions have fundamentally distinctive spillover effects, arguing they work through the same channels and in similar magnitudes as conventional policies.
  - Suggested strong negative political reactions to U.S. unconventional announcements reflected discontinuity around the zero lower bound and greater uncertainty about the Federal Reserve policy reaction function.

### Conclusion — what now?
- Synthesis:
  - Extraordinary measures prevented a greater recession, and arguably a depression, in 2008-09.
  - A consensus may be emerging on the limits of what monetary policy (conventional and unconventional) can achieve: these measures needed support from fiscal policy and balance-sheet repair.
  - Financial stability implications and spillovers remain unresolved; further research is needed to fully understand the policy toolkit.
- Notable quotation: Paraphrasing Adam Posen—these “over-the-counter remedies” needed support from the stronger “prescription medicines” of fiscal policy and balance-sheet repair.

*Source: IMF Research Department, IMF Survey : Top Researchers Debate Unconventional Monetary Policies, November 20, 2015.*

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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sores111915a_