Effects of unconventional monetary policy: theory and evidence
Date
20/03/2015
Ferre De Graeve and Jesper Lindé analyse the central bank’s possibilities for using unconventional monetary policy measures when inflation is low and the policy rate has approached its lower limit. They study experiences abroad and use a macroeconomic model for various simulations.
One alternative they study involves the central bank announcing (providing guidance) that the policy rate will remain low for longer than normal. If the decision is deemed credible by households and companies, monetary policy will immediately become more expansionary, contributing to rising inflation. Another alternative involves the central bank purchasing government and/or corporate bonds for longer maturities. This can contribute to lower term and risk premiums, thus making monetary policy more expansionary. In both alternatives, lower interest rates relative to those abroad may also contribute towards weakening the exchange rate, which increase import prices and normally leads to increased inflation. Similar conclusions are obtained from empirical studies, which indicates that unconventional measures can be used as a complement to conventional monetary policy interventions when inflation and the policy rate are very low.
Economic Review , which has been published today.
Ferre De Graeve and Jesper LindéFerre De Graeve is senior economist in the Research Division within the Monetary Policy Department, and Jesper Lindé is Head of Research at the Riksbank, associate professor at the Stockholm School of Economics, and CEPR research fellow.
