Top Researchers Debate Unconventional Monetary Policies

IMF conference examines lessons from unconventional monetary policies

Quantitative

easing worked but had no striking effects on the real economy

Were the “currency

wars” ever fought?

The

Sixteenth Jacques Polak Annual Research Conference—hosted by the IMF

at its Washington, D.C., headquarters on November 5 and 6—gathered some of

the best researchers in the field to discuss the lessons and the future of unconventional

monetary policies.

Unconventional monetary policies work, but . . .

Much of the recent debate has focused on whether unconventional monetary policies

have had the expected effects on asset prices and the real economy. Several conference

participants tackled these aspects.

Focusing on asset prices, the Federal Reserve Board’s John Rogers explored

the relationship between unconventional monetary policies and risk premiums. He

argued that U.S. monetary policy easing significantly lowersterm premiums on domestic

and foreign bonds (that is, the extra yield on longer maturities) and foreign exchange

risk premiums (that is, the compensation for risks associated with instruments denominated

in foreign currency), indicating the relevance of the portfolio balance channel.

Dietrich Domanski, from the Bank for International Settlements,examined how portfolio

adjustments by long-term investors (insurers and pension funds) to contain mismatches

in the duration of assets and liabilities may have amplified the effects of unconventional

monetary policies.

Other presenters discussed how to assess a country’s monetary policy stance

and its impact on the real economy when the policy interest rate is lowered to zero,

that is, when it hits the zero lower bound. Merrill Lynch’s Dora Xia discussed

how to calculate a shadow interest rate summarizing such a monetary stance (a theoretical

measure of the effective nominal interest rate that can actually be negative). Using

her definition of the shadow rate, she showed that unconventional monetary policies

have been successful in loosening monetary policy and stimulating the real economy

in the United States.

Eric Engen and David Reifschneider from the Federal Reserve Board explored unconventional

monetary policies’ effects on private perceptions about how monetary policy

responds to changes in inflation and output. Feeding these perceptions intothe Federal

Reserve model for the United States, they find a non-negligible effect on unemployment

but argue that the slowadjustment in policy expectations and persistent beliefs

that the pace of recovery would be faster than it was have limited the impact of

actual monetary policy on real activity and inflation.

Tim Eisert, from Erasmus University Rotterdam, argued that the asset purchase program

of the European Central Bank had significantly improved the health of banks in euro

area economies under financial stress, by raising the value of their holdings of

sovereign debt. Healthier bank balance sheets had resulted in increased loans to

the corporate sector, which led to a buildup of cash reserves but no visible improvement

in employment or investment.

Overall, these presentations suggested that unconventional monetary policies had

a visible impact on asset prices and some effects on the real economy, although

of limited magnitude.

Is it time to...