New Monetary Policy Tools for Emerging Market and Developing Economies
IMF News, December 2, 2021
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Bibliographic details
- Published: December 2, 2021
Context and purpose
- Opening Remarks by Deputy Managing Director Bo Li
- Washington, DC
- December 2, 2021
- Remarks introduce a panel discussion on the use of new monetary policy tools in emerging markets and developing economies (EMDEs), with panelists including Lesetja Kganyago, Elvira Nabiullina, Carmen Reinhart, and moderator Tobias Adrian.
Use of unconventional monetary policies in EMDEs
- Unconventional monetary policies—including asset purchases—have been used extensively in advanced economies, especially after the global financial crisis, to ease stress, improve market functioning, aid monetary policy transmission, and provide stimulus to boost inflation toward central bank targets.
- Since the pandemic, many EMDE central banks have deployed asset purchase programs and other unconventional policies.
- Differences in motivations and tool choice for EMDEs compared with advanced economies:
- Most EMDEs still have room to cut interest rates, so the range of policy tools has been narrower (for instance, little reliance on negative interest rates).
- The primary motivation in EMDEs has been easing financial stresses rather than providing macro stimulus.
Observed outcomes during the pandemic
- EMDE central banks have, so far, been quite successful in:
- Lowering government yields.
- Significantly reducing financial market stress.
- Avoiding noticeable capital outflow and depreciation pressures (a past concern that often limited use of these tools).
Key risks highlighted
- The speech emphasizes that experience with asset purchase programs in EMDEs is still relatively limited and that these policies carry considerable risks, some accentuated by limited market depth and less well-developed institutional frameworks. Three specific risks are highlighted:
- Risk 1: Balance-sheet risk choices
- EMDE central banks must decide how much maturity, credit, and exchange-rate risk they are willing to take on their balance sheets.
- Risk 2: Fiscal dominance, governance, and political pressures
- Large-scale purchases of government securities (especially if done on the primary market) can be associated with risks of fiscal dominance.
- Broader governance challenges and political pressures may emerge if central banks support nonbank financial institutions or set up funding-for-lending programs aimed at supporting particular sectors.
- Risk 3: Exit challenges
- Central banks must manage exits from these programs without triggering financial market instability and without succumbing to political pressures to minimize Treasury borrowing costs.
- Political pressures are likely to be all the more acute in the current environment of rising interest rates and high public debt.
Central question and ongoing work
- Core question posed: Whether and how EMDE central banks can benefit from asset purchase programs and other unconventional tools while containing the risks in the three areas above.
- The speech references a recent IMF departmental paper led by Tobias Adrian and colleagues as providing important insights, and notes that this will be a continuous learning process.
- The remarks frame the panel discussion as part of that learning effort and invite insights from the panelists.
Closing
- Remarks express anticipation for the panel discussion organized by MCM colleagues and gratitude to participants.
Source: Opening Remarks by Deputy Managing Director Bo Li, Washington, DC, December 2, 2021 (IMF).