The 2008 financial crisis was a once-in-century systemic shock to the global economy. Post-crisis recovery has been slow compared to typical cycles. World’s major central banks were forced to expand their monetary policy toolkits beyond the conventional open market operations[1]. This included the implementation of negative short-term interest rates (ECB, BOJ), Quantitative Easing programs (Fed, ECB, BOJ, BOE) and the increased usage of forward guidance (Fed, ECB, BOJ, BOE)[2]. The deployment of these untested programs have led to ongoing concerns that the central banks are inadvertently creating the next financial crisis by undermining financial stability.
Central banks are in charge of monetary policies, and most of them in the present-day are run independently of the political institutions, which are in turn responsible for implementing fiscal policies and structural reforms. The mandates of major central banks are mostly centered around price stability, with inflation targets being commonly set at 2%. In addition, some central banks may carry other mandates such as unemployment rate (Fed) and currency stability (ECB, BOJ)[2].
The post-2008 economic recovery could be characterized by “3 lows and 1 high” - low GDP growth, low employment growth, low inflation and high market volatility. Under such context, it was sensible for central banks to maintain the accommodative monetary policies. Given the near-zero interest rate levels, they had no choice but to deploy these unconventional monetary policies, and the inherent assumptions were that the benefits out-weighted the costs. Allianz’s chief economy adviser Mohamed El-Erian used an analogy comparing the central banks to doctors, that if the global economy i.e. their patient is in trouble, they are forced to respond even if they do not necessarily have the right medication[3].
But this does not answer another important question – are these unconventional policies effective? Based on anecdotal evidence, at least some of them seemed to be. The US economy has largely recovered, Eurozone debt crisis has subsided, and core inflation rate in Japan has ticked up moderately. Meanwhile, Keynesian economists continue to argue that there has been an over-reliance on monetary policies, and that they would be more effective if combined with fiscal simulation.
Whether the pursuance of unconventional monetary policies will lead to the next financial crisis remain to be seen. However, they are sensible courses of actions with the right intention, and the global economy will likely be in a worse shape today without them.
References
1. Speech by Janet Yellen at "Designing Resilient Monetary Policy Frameworks for the Future," a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on August 26, 2016 http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm
2. Central banks websites: Fed: https://www.federalreserve.gov/ ECB: https://www.ecb.europa.eu/home/html/index.en.html BOJ: https://www.boj.or.jp/en/ BOE: http://www.bankofengland.co.uk/Pages/home.aspx
3. http://www.marketwatch.com/story/fund-managers-fear-central-banks-will-create-next-lehman-moment-2016-06-08 Extracted on 18 September 2016
Central banks are in charge of monetary policies, and most of them in the present-day are run independently of the political institutions, which are in turn responsible for implementing fiscal policies and structural reforms. The mandates of major central banks are mostly centered around price stability, with inflation targets being commonly set at 2%. In addition, some central banks may carry other mandates such as unemployment rate (Fed) and currency stability (ECB, BOJ)[2].
The post-2008 economic recovery could be characterized by “3 lows and 1 high” - low GDP growth, low employment growth, low inflation and high market volatility. Under such context, it was sensible for central banks to maintain the accommodative monetary policies. Given the near-zero interest rate levels, they had no choice but to deploy these unconventional monetary policies, and the inherent assumptions were that the benefits out-weighted the costs. Allianz’s chief economy adviser Mohamed El-Erian used an analogy comparing the central banks to doctors, that if the global economy i.e. their patient is in trouble, they are forced to respond even if they do not necessarily have the right medication[3].
But this does not answer another important question – are these unconventional policies effective? Based on anecdotal evidence, at least some of them seemed to be. The US economy has largely recovered, Eurozone debt crisis has subsided, and core inflation rate in Japan has ticked up moderately. Meanwhile, Keynesian economists continue to argue that there has been an over-reliance on monetary policies, and that they would be more effective if combined with fiscal simulation.
Whether the pursuance of unconventional monetary policies will lead to the next financial crisis remain to be seen. However, they are sensible courses of actions with the right intention, and the global economy will likely be in a worse shape today without them.
References
1. Speech by Janet Yellen at "Designing Resilient Monetary Policy Frameworks for the Future," a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming on August 26, 2016 http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm
2. Central banks websites: Fed: https://www.federalreserve.gov/ ECB: https://www.ecb.europa.eu/home/html/index.en.html BOJ: https://www.boj.or.jp/en/ BOE: http://www.bankofengland.co.uk/Pages/home.aspx
3. http://www.marketwatch.com/story/fund-managers-fear-central-banks-will-create-next-lehman-moment-2016-06-08 Extracted on 18 September 2016
