Should Unconventional Monetary Policies Become Conventional?

45 Pages Posted: 12 May 2017

See all articles by Pau Rabanal

Pau Rabanal

International Monetary Fund

Dominic Quint

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: March 2017

Abstract

The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after short term policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.

Keywords: United States, Banking, Western Hemisphere, Unconventional Monetary Policy, Optimal Rules, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: C32, E32, E52

Suggested Citation

Rabanal, Pau and Quint, Dominic, Should Unconventional Monetary Policies Become Conventional? (March 2017). IMF Working Paper No. 17/85, Available at SSRN: https://ssrn.com/abstract=2967438

Pau Rabanal

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

Dominic Quint (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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