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Unconventional Monetary Policy

Author

Listed:
  • DIACONESCU DIANA RALUCA

    (WEST UNIVERSITY OF TIMISOARA)

  • BOTEZATU HORTENSIA PAULA

    (WEST UNIVERSITY OF TIMISOARA)

Abstract

Central banks in advanced economies have deployed a variety of unconventional policies during the crisis. It can be seen that the central banks have been mostly successful at achieving their objectives and that spillover to other countries have—thus far at least—been benign overall. Also it can be considered that using unconventional measures may be appropriate in some circumstances, but also they can have disadvantages and all the benefits for using such measures need to be balanced against potential costs. Prior to the crisis the monetary policy was implemented by central banks in a predictable and systematic way, and its transmission mechanism was understood by the economic agents. A transparent central bank reaction function (or broad rule) guided market expectations of future interest rates. After the crisis appeared, the central banks from developed countries applied unconventional tools1 to address two important objectives: first one is to restore the proper functioning of financial markets and intermediation, and second one is to provide further monetary policy accommodation. Both these objectives need to support financial stability, including the diminishing big risks in acute phases of the crisis (collapse of the financial system, depression, and deflation). This paper reviews recent experience with these policies and considers issues related to their continued use in the future in the Romanian economy. It will be a tentative to explain how to avoid liquidity trap2 or get out of it – these also can be seen in the Romanian economy in the last few years.

Suggested Citation

  • Diaconescu Diana Raluca & Botezatu Hortensia Paula, 2015. "Unconventional Monetary Policy," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 264-270, January.
    • Handle: RePEc:cbu:jrnlec:y:2015:v:1i:p:264-270
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    References listed on IDEAS

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    1. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    2. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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