Unorthodox Monetary Policies: Watch Out for Unintended Effects
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Over the past five years, in the aftermath of the Great Recession, the Federal Reserve, European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England (BOE) have pursued unorthodox monetary policies on an unprecedented scale. This has led to a massive expansion in these central banks’ balance sheets and has taken monetary policy into entirely uncharted waters. These effects raise basic concerns as to how these central banks can successfully exit from these policies.
It would seem that these policies have succeeded in providing welcome support to these economies’ recoveries by substantially lowering long-term interest rates and by increasing asset prices. However, they have come with a host of unintended consequences, including incipient asset- and credit-market bubbles. They have also had important spillover effects on other economies in general and on the emerging-market economies. Recent capital flows and currency movements have been particularly disruptive to the emerging-market economies, which have been the main engine of global economic growth.
One has to hope that the world’s major central banks strike the right balance between the short-run gains to be obtained from further QE and the longer-run adverse costs of those policies.
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