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The Role and Effectiveness of Unconventional Monetary Policy

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  • Morgan, Peter

    (Asian Development Bank Institute)

Abstract

This paper reviews the effectiveness of unconventional monetary policies and their relevance for emerging markets. Such policies may be useful either when interbank rates fall to zero, or when a credit crunch or rise in risk premium impairs the normal transmission mechanism of monetary policy. Unconventional monetary policy measures encompass three broad categories: (i) commitment effect, i.e., verbal commitments to maintain very low interest rates for a certain period, either conditionally or unconditionally; (ii) quantitative easing, i.e., targeting the level of current account balances of the central bank; and (iii) qualitative or credit easing, which involves purchases of targeted assets to lower rates and/or increase liquidity in the target market. It also examines issues related to the exit strategy from unconventional policy, and assesses the applicability of unconventional policies for Asian economies other than Japan. Most studies of the commitment effect (or duration effect) suggest that statements by a central bank regarding the duration of a policy of very low or zero interest rates also affect market expectations of interest rates, but the impact is mainly limited to shorter-term rates. The literature on the effects of quantitative easing monetary policy is less conclusive, especially when one accounts for other announcements by the central bank. Regarding qualitative easing (credit easing) policy, the effect of expanding outright purchases of government bonds on bond yields looks limited. However, other kinds of asset purchase interventions do seem to have been more successful in relieving market stresses. For Asian countries aside from Japan, unconventional policies look most attractive as a way to relieve funding blockages in specific markets rather than to stimulate overall growth. Only India; Republic of Korea; Singapore; and Taipei,China adopted unconventional measures, and those of the middle two were chiefly related to their use of the Fed's swap line for United States dollars to ease dollar shortages in the region. However, if growth of United States consumption slows structurally, this may force Asian economies to rely more on unconventional monetary policy measures during future downturns.

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File URL: http://www.adbi.org/working-paper/2009/11/11/3366.role.unconventional.monetary.policy/
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Bibliographic Info

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 163.

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Length: 34 pages
Date of creation: 11 Nov 2009
Date of revision:
Handle: RePEc:ris:adbiwp:0163

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Keywords: unconventional monetary policy; monetary policy emerging markets;

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Cited by:
  1. Shinji Takagi, 2009. "The Global Financial Crisis and Macroeconomic Policy Issues in Asia," Macroeconomics Working Papers 22876, East Asian Bureau of Economic Research.
  2. Masahiro Kawai & Peter J. Morgan, 2012. "Central Banking for Financial Stability in Asia," Finance Working Papers 23328, East Asian Bureau of Economic Research.
  3. Morgan, Peter J., 2013. "Monetary Policy Frameworks in Asia: Experience, Lessons, and Issues," ADBI Working Papers 435, Asian Development Bank Institute.
  4. Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward?," Working Papers id:3139, eSocialSciences.
  5. Teodora Cristina Barbu & Iustina Boitan, 2012. "Central Banks’ Response to the Current Financial Crisis – Between Costs and Benefits," International Journal of Economics and Financial Issues, Econjournals, vol. 2(1), pages 12-20.

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