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Addressing Spillovers from Prolonged U.S. Monetary Policy Easing
Author:
Stephen Cecchettinull

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Mr. Machiko Narita
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Umang Rawatnull

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Ms. Ratna Sahay
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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 182
Language:
English
Publication Date:
09 Jul 2021
DOI:
https://doi.org/10.5089/9781513584492.001
ISBN:
9781513584492
ISSN:
1018-5941
Pages:
37
Keywords:
Spillovers; prolonged monetary policy easing; financial stability; macroprudential policies; foreign-exchange intervention; capital flow management measures; U.S. monetary policy; monetary policy easing; leverage ratio; financial institution leverage; monetary policy spillover; FXI policy; Macroprudential policy; Spillovers; Capital inflows; Capital flow management; Macroprudential policy instruments; Global
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2021: Issue 182