- Recent capital flows and currency movements have been particularly disruptive to the emerging-market economies.
- Unorthodox monetary policies have had a positive short-run impact on the industrialized countries and on the global economy.
- Maintaining or even increasing the pace of QE could accentuate the longer-run unintended consequences of unorthodox monetary policies.
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.