Keynote lecture at the International Center for Monetary and Banking Studies (ICMB),
Geneva, 28 April 2009
The escalating financial crisis since last autumn of 2008 has pushed the theme of conventional and unconventional monetary policy to centre stage.
Central banks throughout the world have been responding to the crisis by taking both
- conventional and
- unconventional policy measures.
It is important to have a
- good understanding of the unconventional policies and
- how they differ from the conventional ones.
To understand, focus on four groups of questions:
1. First, why and when should central banks resort to such measures?
There is no tried-and-tested timetable or sign-posted pathway for moving from conventional to unconventional measures. For instance, an issue to consider is whether unconventional measures should or can be implemented
- only after the nominal short-term interest rate has reached its lower bound and while downside risks to price stability prevail, or
- be adopted while interest rates are still positive.
2. Second, what are the main characteristics of unconventional measures?
3. Third, how are unconventional measures implemented if and when they are needed?
To answer this question, we have to distinguish between different types of unconventional measures,
- from quantitative easing
- to credit easing.
3. Fourth, how and when do central banks need to unwind the extra monetary stimulus?
By definition, unconventional measures are not what is generally done, so they are not supposed to become the standard mode of monetary policy. When deciding on them, monetary policy-makers have to think ahead and ask themselves:
- “We can get in, but how do we get out?”
- They need to consider carefully the timing of their withdrawal of such monetary measures – for there are risks in doing it too early, and there are risks in leaving too late.
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