Late last week, the Organization for Economic Co-Operation and Development published a working paper entitled "Monetary Policy Responses To The Crisis and Exit Strategies," which analyzes the "unconventional measures" taken by the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, the Sveriges Riksbank and the Swiss National Bank in response to the recent economic crisis, assesses their impact and discusses possible exit strategies.

A brief summary of the findings in the paper is as follows:

  • Unconventional measures such as lowering policy rates to very low levels, increasing liquidity provision to financial institutions, intervening directly in wider segments of the financial markets, purchasing long-term government bonds, and supporting specific institutions "appear to have contributed to stabilizing the financial markets" and helped "set the stage for the subsequent economic recovery." However, retaining these measures for too long can have "adverse implications for the functioning of financial markets and inflation," and central banks must "exit from many of the crisis-driven measures by reducing their intervention."
  • Exit-strategies must take into account the "goal of preserving financial stability," which "cannot be taken for granted in the wake" of the recent economic crisis.
  • The exit from "unconventional measures" will differ for shorter- and longer-term assets and will involve the use of liability management instruments. For example, for "financial stability reasons and in view of possible contingencies in unsettled conditions," it is important for banks to "have access to ample liquidity" and "abrupt termination of shorter-term liquidity facilitates should be avoided." However, increasing the cost of borrowing under such facilities is warranted to "discourage there use outside contingencies." In addition, central bank sales of "long-dated" assets is an important exit strategy, but retaining such long-term assets to maturity would also "avoid abrupt large losses that would have to be realized if sold in an environment of higher long-term interest rates."
  • Withdrawal of monetary policy measures should be "conducted at a slow pace," in light the "uncertainty concerning the underlying strength of financial markets," the "existence of large slack," and muted inflation outlook.
  • The framework for monetary policy implementation may have to be "reassessed." In particular, given that central banks have extended such liquidity provisions during a period of crisis, the question remains as to "how generous central banks should be in providing liquidity under normal market conditions."