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What Next for Unconventional Monetary Policies?

Although interest-rate cuts and central-bank asset purchases were highly effective in resolving the 2008 financial crisis, they have proved utterly disappointing in the years since. At this stage, it should be clear that the sustained weakness of private-sector investment is not a problem central bankers can fix on their own.

SYDNEY – The Bank for International Settlements (BIS), the central bankers’ club in Basel, Switzerland, recently conducted an in-depth evaluation of the unconventional monetary policies that have become the norm in many countries since the 2008 financial crisis. It should come as no surprise that the resulting report, compiled by a committee of central bankers reviewing their own past performance, finds little to fault. That is fine; the financial system was saved, after all. But a more important question is whether, and to what extent, unconventional policies remain relevant in the post-crisis world.

Back in 2008, the primary task for policymakers was to prevent the financial sector from collapsing and stabilize the economy. Conventional policies proved insufficient, and it became clear that other measures were needed to address the financial meltdown directly. Chief among these was quantitative easing, in which the central bank buys up assets in order to inject liquidity into the financial system.

In November 2008, at the height of the crisis, the US Federal Reserve started purchasing securities in the then-frozen mortgage market. QE1, as it came to be known, was highly successful: mortgage lending soon resumed, supporting the crippled housing market, and many borrowers were able to refinance their loans at much lower interest rates.

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