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Spillover Effects from Unconventional and Conventional Monetary Policy

Jamus Lim's picture

I recently had the opportunity to attend a conference co-organized by the European Central Bank and International Monetary Fund on international dimensions of conventional and unconventional monetary policy. As one might imagine, an evaluation along the theme is opportune, coming at a time when the effects of quantitative easing, forward guidance, and other forms of unconventional monetary policy have been given enough time to percolate through the economy. As one may expect for an ECB-organized pow-wow, the conference featured primarily a central banker crowd, although there were notable representatives from academia as well.

Source: Used under CCL from Wikimedia Commons

The two keynotes on the first day set the theoretical stage for thinking about the international aspects of monetary policy in a post-crisis world. Jonathan Ostry revisited a theme common in the theretical literature from the late 1980s, on international macro policy coordination. Building off a simple two-country model (PDF), he pointed to how coordinated policies can improve welfare in a one-instrument, two-target setting (relative to the uncooperative Nash outcome), as well as how uncertainty over the gains from policy coordination can (perhaps paradoxically) strengthen the case for coordination (mainly stemming from the likelihood that cross-border transmission effects are usually more uncertain than domestic ones). In the second keynote, Charles Engel pondered over a host of open questions that remain unanswered in our existing framework for open-economy macro. One key takeaway was how existing New Keynesian-style models continue to rely on cost-push and productivity shocks to generate dynamics, neither of which appear to capture well the intuitive notion that we generally want to adopt counter (rather than pro)cyclical policy in such cases (he went on to suggest that embedding uncertainty shocks (PDF) into open-economy NK models appear to be a promising way forward in this regard).

The remaining presentations from the first day dealt with, among other issues, the financial market and macroeconomic impact of the Outright Monetary Transactions (OMT) program of the ECB; unconventional monetary policy by the Fed, ECB and BoJ on high-frequency financial market data; and the spillover effects (PDF) from G4 balance sheet expansion on, inter alia, emerging economies. One message that emerges from these papers is that, like traditional monetary policy, unconventional policies do exert real (albeit sometimes modest) effects on not just their home economies, but occasionally (and perhaps ironically) engender larger effects on other economies.

The sessions on the second day dealt more with specific country experiences, especially among emerging markets (Brazil, India), but also addressed currency internationalization issues (with an obvious focus on the euro). One additional sessions is worth noting: a keynote by Benoit Coeure, who offered a senior policymaker perspective along the lines of the central themes of the conference. He raised a number of salient points on the challenges of monetary policymaking in a financially globalized world. One key issue was how changes in the structure of financial markets---with greater integration at the global level---meant that policy cooperation may actually need to focus more on medium- and long-term issues (such as coordination in the regulatory regime and reform process) merit greater focus than shorter-term concerns (such as formal monetary coordination). He also pointed to difficulties associated with the political economy of coordination (with political cycles impacting monetary policy incentives), an area that may be understudied in the existing literature.

Although the focus of the conference was not primarily on developing countries, a number of themes coincided with those reported in the thematic chapter of the first quarter 2014 (PDF) issue of the Global Economic Prospects report. In particular, it was clear that by a host of distinct measures, unconventional monetary policy had nontrivial, observable effects on a range of financial and real variables, not just at home but also abroad. Consequently, countries---especially those with large, influential central banks---should be aware that their policy actions can engender spillovers, the effects of which may even be larger than those that they experience at home. In an increasingly financially globalized world, the need to take such interdependencies into account becomes more important than ever.

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