Unconventional monetary policy tools: a cross-country analysis

Report prepared by a Working Group chaired by Simon M Potter (Federal Reserve Bank of New York) and Frank Smets (European Central Bank).

In response to the unprecendented challenges brought about by the Great Financial Crisis and its aftermath, central banks departed from their established approach to the conduct of monetary policy and implemented a number of unconventional monetary policy tools (UMPTs). After a decade of experience with UMPTs the report takes stock of central banks' experience and draws some lessons for the future.

The report focuses on four sets of tools: negative interest rate policies, new central bank lending operations, asset purchase programmes, and forward guidance. It offers a summary of central banks' shared understanding of the efficacy of these tools across countries, as well as the way that they were sequenced and coordinated. 

The report concludes that, on balance, UMPTs helped the central banks that used them address the circumstances presented by the crisis and the ensuing economic downturn. It identifies side effects, such as dis-incentives to private sector deleveraging and spillovers to other countries, but does not consider them sufficiently strong to reverse the benefits of UMPTs.

The report also discusses whether, and under what circumstances, these tools could be useful in the future. Central banks report that the tools have earned a place in the monetary policy toolbox, but they also highlight that their use should be accompanied by measures that mitigate their potential side-effects. They also highlight that under the circumstances when the tools can be helpful, they need to be used in decisively but in a context that includes a wider set of policies as to avoid overburdening the central bank.

JEL Classification: E43, E44, E52, E58, E65, F42