Central bankers have responded to the global financial crisis with a mix of unconventional policies, including negative rates and asset purchases. Addressing September’s OMFIF main meeting in Rome, in comments reproduced in this month’s Bulletin, Banca d’Italia Governor Ignazio Visco noted that such policies helped cushion the initial shock, and that subsequent GDP growth and inflation would have been lower without them. But they have hardly provided a panacea. As Visco noted, such policies have distorted markets and created risks for financial stability.
Extraordinarily loose policies have failed to boost growth substantially and created dangerous debt overhangs in many economies. There have been some collateral effects too, examined in the October Bulletin. Charles Goodhart and Geoffrey Wood argue that such measures have hurt bank profitability. Stijn Claessens and Nicholas Coleman of the Federal Reserve Board of Governors, and Michael Donnelly of MIT, consider evidence on the effect on banks’ net interest margins. Ben Robinson presents the findings of an OMFIF report, produced in conjunction with BNY Mellon, showing that unconventional policies have reduced the supply of liquid assets for collateral. Panicos Demetriades, former governor of the Central Bank of Cyprus, highlights the negative consequences for central banks’ credibility and the notion of their independence.