easing worked but had no striking effects on the real economy
wars” ever fought?
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
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
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...