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Opening Remarks at Advances in Monetary Economics Conference

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.

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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

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.

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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.

IMF Communications Department


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