Global effects of unorthodox monetary policies

Reuters

The Lehman Brothers building is pictured in New York September 15, 2008.

Article Highlights

  • Recent capital flows and currency movements have been particularly disruptive to the emerging-market economies.

    Tweet This

  • Unorthodox monetary policies have had a positive short-run impact on the industrialized countries and on the global economy.

    Tweet This

  • Maintaining or even increasing the pace of QE could accentuate the longer-run unintended consequences of unorthodox monetary policies.

    Tweet This

Subscribe to
The Ledger
Get AEI's weekly snapshot of economic news, views, and cues.

First Name:
Last Name:
Email:
Zip Code:

In the aftermath of the Great Recession, major central banks have scrambled to support economic recovery and to avoid deflation through highly accommodative and unorthodox monetary policy stances. Although relatively successful in the short term, these policies have given rise to incipient asset- and credit-market bubbles and to spillover effects on the emerging-market economies, which could threaten the longer-run world economic outlook. Going forward, these central banks need to be very much more mindful than they have been to date of the longer-term unintended consequences of their policy actions. 

Over the past five years, in the aftermath of the Great Recession, the Federal Reserve, European Central Bank (ECB), Bank of Japan (BOJ), and Bank of England (BOE) have pursued unorthodox monetary policies on an unprecedented scale. They have done so in an effort to stabilize their respective countries’ financial systems and to both support an economic recovery and to avoid a lapse into negative inflation. This has led to a massive expansion in these central banks’ balance sheets and has taken monetary policy into entirely uncharted waters. These effects raise basic concerns as to how these central banks can successfully exit from these policies.

There can be little question that unorthodox monetary policies were successful in stabilizing the major industrialized economies’ respective financial systems in the immediate aftermath of the September 2008 Lehman Brothers crisis. It would also seem that these policies have succeeded in providing welcome support to these economies’ recoveries by substantially lowering long-term interest rates and by increasing asset prices. 

However, they have come with a host of unintended consequences, including incipient asset- and credit-market bubbles, which both cloud the global economy’s longer-run economic outlook and raise questions as to whether the limits of these policies’ usefulness are now being reached. They have also had important spillover effects on other economies in general and on the emerging-market economies in particular that now pose a real risk to the global economic outlook.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Event Registration is Closed
Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Event Registration is Closed
Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.