The unconventional monetary policies of central banks have bought global policymakers the time and space to carry out the reforms needed to lay the foundation for lasting growth, IMF Managing Director Christine Lagarde told an audience of top officials at the Jackson Hole Economic Symposium.
"The challenge for today’s generation of policymakers is to rethink and reimagine how to get our economies back to work. One of the most striking aspects of that has been the willingness of central banks in advanced economies to ‘dive into the deep end’ of the policymaking pool.
"The challenge for today’s generation of policymakers is to rethink and reimagine how to get our economies back to work. One of the most striking aspects of that has been the willingness of central banks in advanced economies to ‘dive into the deep end’ of the policymaking pool.
In many respects, central banks have been the heroes of the global financial crisis. Compared with conventional monetary policy, the unconventional monetary policies(UMP) of the past few years have been bolder in ambition and larger in scale. These exceptional actions helped the world pull back from the precipice of another Great Depression" said Lagarde.
"The crisis also gave us cause to rethink the extent to which the world is interconnected. A bankruptcy in the United States in 2008 brought the world economy to its knees. Then Eurozone troubles shook the global economy again. Another worry today is the risk of a slowdown in emerging markets pulling back growth everywhere.
Unconventional monetary policies bring an added twist. It reminds us that policy actions in one corner of the world can reach all corners—and it is the job of the IMF to shine a light on developments in all corners of the world"
All policymakers, within countries and across countries—have a responsibility to take the full range of actions needed to restore growth and stability.”
The Merits of UMP So Far:
Were unconventional monetary policies needed and did they help? I know this is an open question for some. The Fund’s clear assessment, however, is that the impact so far has been positive.
Why do I say that? Early in the crisis, UMP helped prevent a collapse of the financial system and a collapse of activity. This was the case with Quantitative Easing in the United States and Large Scale Assets Purchases in the U.K. Later, the ECB’s Long-Term Refinancing Operations and Outright Monetary Transactions significantly reduced the tail risk of a Euro area breakup.
Faced with financial turmoil, UMP helped support economic activity and financial stability—both domestic and global. This is certainly true in the initial phase of UMP, when these objectives worked in unison.
Estimates suggest that quantitative easing, the purchase of assets by the U.S. Federal Reserve, boosted world output by more than 1 percent. Although the major gains were in the early phases, unconventional monetary policy has been a success, she said.
While emphasizing that there should be “no rush to exit,” Lagarde said that the period of exceptionally loose monetary policy must eventually end. But when exactly this happens will depend on country circumstances. “In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan, too, exit is very likely some way off,” she said.
“One thing we can say for certain: The path to exit will and should depend on the pace of recovery,” Lagarde added.
Source: IMF Working Paper
