The use of unconventional monetary policy tools, such as asset purchases and negative interest rates, has had negative side effects. But those side effects are not severe enough to outweigh the value of extreme central bank actions to prop up economies, according to a pair of reports from global banking regulators.
On Monday, the Basel Committee on Banking Supervision released two reports from the Committee on the Global Financial System (CGFS) and the Markets Committee examining the use of unconventional monetary policy tools by central banks in response to the global financial crisis.
One of the reports found that, on balance, the use these tools (including negative interest rates, new central bank lending, asset purchase programs and forward guidance) helped the central banks address the impact of the crisis and the resulting economic downturn that followed.
The report noted that the deployment of these tools has had side effects, including disincentives to private sector deleveraging and spillovers between countries, but it found that these negatives don’t outweigh the benefits.
The other report examined the effects of central banks expanding their balance sheets to an unprecedented degree in response to the crisis. It found that these policies helped improve market functioning, but that they have also had negative side effects that resulted in some “market malfunctioning.”
Again, the second report concluded that, overall, the balance sheet expansion worked, while also acknowledging that “prolonged use of large balance sheet policies may have longer-term adverse effects on the market ecosystem, but these are hard to measure at this point.”
The reports detailed some lessons and best practices for central bankers in their future use of unconventional monetary policy tools.