Addressing Spillovers from Prolonged U.S. Monetary Policy Easing

By Stephen Cecchetti, Machiko Narita, Umang Rawat, Ratna Sahay

July 9, 2021

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Stephen Cecchetti, Machiko Narita, Umang Rawat, and Ratna Sahay. Addressing Spillovers from Prolonged U.S. Monetary Policy Easing, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.

Subject: Balance of payments, Capital flow management, Capital inflows, Financial sector policy and analysis, Macroprudential policy, Macroprudential policy instruments, Spillovers

Keywords: Capital flow management, Capital flow management measures, Capital inflows, Financial institution leverage, Financial stability, Foreign-exchange intervention, FXI policy, Global, Leverage ratio, Macroprudential policies, Macroprudential policy, Macroprudential policy instruments, Monetary policy easing, Monetary policy spillover, Prolonged monetary policy easing, Spillovers, Spillovers, U.S. monetary policy

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/182
Stock No:

WPIEA2021182
ISBN:

9781513584492
ISSN:

1018-5941

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