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Central Banks’ Year of Reckoning

In the absence of political solutions, central banks in the decade since the 2008 financial crisis have rolled out one unconventional monetary policy after another, with various justifications and varying effectiveness. Now that the period of monetary exceptionalism seems to be coming to an end, central bankers must soberly assess their own record.

CHICAGO – Since 2008, central banks in industrial countries have deviated from ordinary monetary policymaking in a variety of ways. They’ve tried to persuade the public through “forward guidance” that interest rates would stay low for extended periods of time. And they’ve deployed various programs such as long-term refinancing operations (LTROs), the Securities Markets Program (SMP), and quantitative easing (QE) in pursuit of various goals.

More recently, central banks have also introduced negative interest rates and – from the Bank of Japan (BOJ), which has always been at the forefront of innovation – yield-curve targeting. And some central banks have resorted to unconventional but well-known policies such as direct exchange-rate targeting.

But now, with most major central banks apparently seeking to normalize monetary policy, we should ask why these extraordinary measures were used and whether they worked. Looking forward, we should ask what effect phasing them out will have, and whether their use raises long-term concerns. By addressing these questions, central bankers will be better prepared to grapple with future crises.