Standards for Non-Standard Monetary Policy

PARIS – The widespread introduction of unconventional monetary-policy measures by major central banks has been a defining characteristic of the global financial crisis. We have seen enhanced credit support, credit easing, quantitative easing, interventions in currency and securities markets, and the provision of liquidity in foreign currency – to name but a few of the measures taken.

Some view these measures as a continuation of standard policy by other means. Once nominal interest rates cannot be lowered further, central banks use other tools to determine the monetary-policy stance. They have reached the end of the road, so they shift into four-wheel drive: they expand their balance sheets and inject liquidity to influence the structure of yields and returns and thereby stimulate aggregate demand. But when central banks return to the road – that is, exit from the non-standard measures – they must retrace their path, first unwinding unconventional policy, and only then raising interest rates.

Let me suggest a different view. Say that key interest rates are to be set at levels considered appropriate to maintain price stability, drawing on regular, comprehensive assessment of economic and monetary conditions. Following standard practice, interest rates can be more or less significantly positive, very close to zero, or at zero.

But, whatever the level of nominal interest rates, the monetary-policy stance established in this way has often been poorly transmitted to the economy, particularly in times of acute crisis. During the financial crisis, market functioning was impaired, at times very profoundly. Non-standard measures helped to clear standard measures’ transmission path.