Central Banks Can Plan Smooth Exit From Policies to Fight Crisis

Unconventional central bank policies in some advanced economies have been beneficial for global economy

Central banks have tools to limit financial market volatility, exit may still be bumpy

IMF analysis can help global policy collaboration

Policymakers in countries using unconventional monetary policy can counter volatile financial markets with clear communications about their exit plans, according to the IMF.

In a speech at the end of August in Jackson Hole, Wyoming, IMF Managing Director Christine Lagarde said central bank policies have bought global policymakers the time and space to carry out the reforms needed to lay the foundation for lasting growth.

This new work from the IMF takes stock of unconventional monetary policies and focuses on their global impact so far, and looks ahead towards exit and prospects for global policy collaboration.

“Exit from unconventional monetary policy will lead to some normal market adjustments, but there could be additional volatility due to market reactions beyond the control of the central bank,” said Karl Habermeier, an Assistant Director in the IMF’s Monetary and Capital Markets Department. “This volatility could have significant spillovers to the rest of the world, with risks to macroeconomic and financial stability. Countries with stronger macroeconomic and policy fundamentals should cope better with market turbulences.”

Previous IMF work focused on the economic and financial stability effects in the countries using unconventional monetary policies.

Global effects

Both advanced and emerging economies have benefitted from the use of unconventional monetary policies in some advanced economies. The picture is clearer for early policies to support financial markets functioning and intermediation. A severe financial sector meltdown and a major recession in advanced economies would have had dire consequences globally.

The strong outward capital flows generated by accommodative monetary policies, which contributed to some useful rebalancing of global demand, have also given rise to policy challenges in recipient countries.

The IMF research concludes countries have managed these changes well in the period up to the U.S. Federal Reserve’s first tapering announcement in May 2013. Case studies of 13 of the largest countries that did not use unconventional monetary policies find that none of these countries had exhibited wide-spread or acute economic or financial instability, including as a result of...