Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF
July 13, 2020
Hello everyone, good morning to you all.
I am Tobias Adrian, the Financial Counsellor and Director of the Monetary and Capital Markets Department of the IMF.
I am very happy to welcome you to the inaugural edition of the “Advances in Monetary Economics” conference, which will be followed by the Michel Camdessus lecture, given tomorrow by Thomas Jordan, the Chairman of the Swiss National Bank.
As you all know, the conference today is centered around the theme of appropriate monetary policy in a “lower-for-longer” interest rate environment. This topic is more relevant now than ever as the world economy is facing an unprecedented shock in the form of COVID-19 in an environment where monetary policy room is already very limited.
Even before the current crisis, central banks in advanced economies had been struggling with low inflation and low equilibrium real rates. Several of these central banks responded with unconventional monetary policies to support growth and inflation objectives. The use of these new monetary policy tools was largely born out of necessity: partly to address disruptions in monetary policy transmission, and partly to provide additional monetary stimulus once policy rates were constrained by the effective lower bound. While by now there is a considerable literature documenting the effectiveness these unconventional policies, many aspects remain to be better understood.
The prolonged period of low interest rates and the use of unconventional policies has raised concerns about unintended consequences such as search for yield, buildup of leverage, and spillovers. Emerging markets, on the other hand, have been facing spillovers stemming from these unconventional monetary policies by central banks in advanced economies. These manifest themselves, most notably, through capital inflow surges and the risk of their reversals.
The current COVID-19 crisis has triggered even more radical new actions, both by advanced- and emerging market economies. Advanced economies’ central banks with limited conventional monetary policy space have relied on an unprecedented expansion of their balance sheets. The Fed, for example, has entered new territory with measures like lending to securities firms, backstopping MMFs, as well as direct lending to banks, major corporate employers, and SMEs. A number of EM central banks have also embarked in unconventional policy measures for the first time . Although these policy actions have improved market functioning and eased financial conditions, significant challenges remain ahead.
We, at the Fund, are deeply committed to engaging in these pivotal issues facing central banks. One way in which we are doing so is through strengthening our dialogue with both academia and central banks, and is reflected in our decision to launch this new annual conference on monetary policy to accompany the Camdessus lecture.
We are also making an ongoing and concerted effort to build our analytical capacity in monetary policy. The Fund has produced an extensive body of work in this area, including on the experience and prospects for unconventional monetary policy, effectiveness of negative interest rates, and the medium-term risks to growth and stability due to accommodative conditions and the lower-for-longer interest rate environment. We have also enhanced our understanding of monetary policy transmission in emerging market- and developing economies. Going forward, the Fund intends to remain at the forefront on this topic, including through work on the macroeconomic policy mix under lower-for-longer interest rates; financial stability risks; spillovers; and potential distributional effects. Most pertinently, a new Monetary Policy Modeling Unit has been formed to allow a deeper dive into these issues and to strengthen our technical dialogue with central banks around the world.
We are also taking a renewed, closer look at policy options for emerging market economies and open economies in dealing with volatile capital flows. While not altering the role and objectives of monetary policy, we have been seeking to understand the complementarities among the various policy choices that these countries have. The aim is to arrive at a new “integrated policy framework”, which can compare the costs and benefits of four tools — monetary policy, macroprudential policy, exchange rate interventions, and capital flow measures — to help stabilize economies exposed to domestic and external shocks. Importantly, the integrated aspect of the new framework will capture how these tools interact with each other and with country circumstances. Last week, we published three key working papers on this topic.
These are challenging issues, which require questioning conventional wisdom and striving to evolve our views and frameworks to the changing realities and needs. This conference will provide a platform to push forward our thinking. We have an impressive lineup of speakers and papers today and I really look forward to hearing from them. With that, let’s start our first session of the day.