Adverse Effects of Unconventional Monetary Policy

Major parts of the world economy are experiencing low growth, a rise in financial volatility, and low rates of inflation following the recent waves of financial crises and a prolonged period of low interest rates. In Japan and in large parts of the Eurozone, the crises persist. In large parts of the world, unconventional monetary policies—that is, ultra-low interest rates and large-scale asset purchases, also known as “quantitative easing” (QE), are seen as important determinants of employment and growth.

Unconventional monetary policies, especially ultra-low interest rates, in the large advanced countries can discourage investment and lead to adverse distributional effects. Both factors are reflected in declining economic growth and political dissatisfaction.

To stop the resulting vicious circle of policy interventions and declining growth, a timely exit from the ultra-low interest rates is necessary to reconstitute the allocation and signaling function of the interest rate as well as the principle of liability in financial markets. By gradually, and irrevocably, raising interest rates, growth could be restored.

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