Should Unconventional Monetary Policies Become Conventional?

IMF Working Papers, March 31, 2017

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Should Unconventional Monetary Policies Become Conventional?

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Bibliographic details

• Authors: Dominic Quint, Pau Rabanal
• Published: March 31, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475591330.001

Summary

• The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world.
• Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after short-term policy rates reached their effective lower bound.
• This paper studies whether unconventional monetary policies (UMP) should still be used when economic conditions and interest rates normalize.
• The analysis uses an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States.

Main findings

• The benefits of using UMP in normal times are substantial, equivalent to 1.45 percent of consumption.
• The benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks.
• When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.

Modeling approach and scope

• Model type: estimated non-linear DSGE model.
• Key model features: banking sector, long-term private debt, long-term public debt.
• Geographic focus: United States.
• Policy instrument studied: asset purchase programs (a form of UMP).

Policy implications and scenarios

• Use of UMP in normal times can yield substantial welfare-equivalent gains (stated as consumption-equivalent).
• Optimal use of UMP should be conditional on the nature of shocks:
  • Financial shocks: material benefits from UMP.
  • Supply and demand shocks: little to no benefit from UMP.
• Policy design should account for the shock-dependent effectiveness of asset purchases.

Subjects and keywords

• Subjects: Banking, Consumption, Corporate bonds, Financial institutions, Inflation, Monetary policy, National accounts, Prices, Sovereign bonds, Stocks, Unconventional monetary policies
• Keywords: Banking, central bank, Consumption, Corporate bonds, Global, goods producer, government bond purchase, Inflation, long-term debt, monetary policy, Optimal Rules, optimal UMP policy, purchases of government bonds, Sovereign bonds, supply shock, transmission mechanism, UMP matter, UMP reaction, UMP rule, UMP shock, Unconventional monetary policies, Unconventional Monetary Policy, unwinding UMP, WP

IMF Working Paper — Should Unconventional Monetary Policies Become Conventional? (Working Paper No. 2017/085)

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• Should Unconventional Monetary Policies Become Conventional?, WP/17/85, March 2017
  • Should Unconventional Monetary Policies Become Conventional?, WP/17/85, March 2017 (Markdown version)
  • Should Unconventional Monetary Policies Become Conventional?, WP/17/85, March 2017 (PDF)