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Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?
Article

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Stephen Cecchetti, Tommaso Mancini-Griffoli and Machiko Narita
IMF, 2017
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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Well Structured

Recommendation

The Federal Reserve found itself between a rock and a hard place following the 2008 financial crisis. The central bank’s unusual actions and extraordinary monetary policy accommodation no doubt helped prevent a greater economic calamity, but there is some question about whether the Fed may have also unwittingly stoked financial institutions’ risk-taking tendencies. Economists Stephen Cecchetti, Tommaso Mancini-Griffoli and Machiko Narita’s overview of whether financial institutions have taken on excessive debt in response to the availability of easy money sheds some much-needed light on this important issue, although their report does not come up with any definitive conclusions about the impacts of heightened risk-taking. getAbstract suggests this succinct, topical report to policy experts, economists and financial services professionals.

Summary

The Federal Reserve resorted to various measures to keep the US economy on an even keel following the global financial crisis. Beginning in 2007, the central bank eased monetary policy through interest rate management and balance sheet actions. While such measures likely lessened the impact of the Great Recession and warded off a full-fledged depression, the extended period of monetary easing has raised questions about the potential fallout on the world’s economies.

Data on the asset-to-equity...

About the Authors

Stephen Cecchetti is a professor at Brandeis International Business School. Tommaso Mancini-Griffoli and Machiko Narita are IMF economists.

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