IMF Assesses New Era of Monetary Policy

Unconventional central bank policies in advanced economies stabilized financial system

Effects on other economies have been mixed

Length, breadth of policies may pose risks

The latest analysis from the IMF is part of ongoing work to examine the role and effects of monetary policy during and after the global crisis.

Central banks in a number of countries have deployed new tools to counter the effects of the global crisis, which experts often refer to as unconventional monetary policy.

Two recent chapters in the IMF’s Global Financial Stability Report and the World Economic Outlook focused on the financial stability implications of these policies and the behavior of inflation during the crisis and the subsequent sluggish recovery, respectively.

This new work from the IMF examines the policies, their objectives, their effects at home and abroad, and what role they might play in the future.

“These policies were instrumental in ensuring financial and economic stability following the global crisis,” said Karl Habermeier, an Assistant Director in the IMF’s Monetary and Capital Markets Department. “But monetary policy cannot do everything. Governments and banks should use the breathing space provided by these unconventional policies to move forward with needed fiscal, structural, and financial sector reforms.”

Stabilize economy, reduce risks

Central banks in the United States, United Kingdom, Japan, and euro area adopted a series of unconventional monetary policies during and after the crisis with two broad goals in mind.

The first was to stabilize financial markets by injecting cash into the financial system through direct liquidity provision and purchases of private assets.

The second was to provide further monetary policy assistance when interest rates reached zero or near zero lower bound by indicating they would keep them low for a while; and by purchasing bonds.

The two objectives, while conceptually distinct, are closely related. Both ultimately aim to support economic stability, including by reducing risks in acute phases of the crisis—notably preventing the collapse of the financial system, a depression, and deflation.

These policies achieved their goals in advanced economies, and were especially effective at the time of greatest financial turmoil, according to the IMF. Market functioning was broadly restored, and the possibility that the worst risks would resurface declined significantly.

Policies also decreased long-term bond yields...