Why is Monetary Policy Underrated?

Despite the European Central Bank's decision to launch quantitative easing, many economists, policymakers, and central bankers continue to underestimate unconventional monetary policy. But, to understand QE's transformative potential, they need only look to its recent success in Japan.

TOKYO – Last month – just a few days before the European Central Bank announced its intention to initiate quantitative easing (QE) – I attended a seminar in Geneva with international journalists, policymakers, and investors. The discussions there, much like those in Japan before Prime Minister Shinzo Abe launched his groundbreaking economic-reform strategy in 2012, reflected an inadequate understanding of unconventional monetary policy's transformative potential.

Indeed, at the seminar, European economists and journalists – especially the Germans, and even some of the Britons in the room – adopted a dismissive tone. “Monetary policy's power is limited, particularly when the interest rate is so low," some said. “We cannot count on accommodative monetary policy to spur a portfolio reshuffling," others added.

These statements were all too familiar – and somewhat surprising, given the progress that Japan's ongoing QE-based strategy has enabled the country to make. Clearly, many in Europe lack an understanding of the history and significance of so-called “Abenomics"; but such an understanding should inform their monetary-policy debates.