Dealing with disappointment
by Burcu Ünüvar
Sceptics remain uncertain about whether central banks saved the global economy after the 2008 financial crisis. Undeniably, however, monetary policy-makers helped bolster business sentiment by flooding the world with cheap money. Nearly 10 years on, there are confusing signals about the future of monetary policy. Central banks’ forward guidance appears to be exerting diminishing influence.
Attitudes towards central banks appear to be following a similar course to those towards new technologies: exaggeration is followed by disappointment and, finally, understanding. Attitudes towards monetary policy appear to be reaching the end of the ‘exaggeration’ phase, and risk creeping towards ‘disappointment’.
The separation principle in which monetary policy targets price stability and regulatory policies target financial stability is no longer valid. The consensus about the ‘multi-tool, multi-objective’ approach to central bank policy is well established. But juggling multiple objectives inevitably puts central banks in a position of great power, and loads expectations on policy-makers.
Central bankers, international financial institutions and market participants overestimated the power of unconventional policy and underestimated the extent of the fundamental problems in the world economy. Comparatively little is known about quantitative easing, as this is the first time it has been implemented on such a large scale.
Results which do not meet elevated expectations risk introducing the ‘disappointment’ phase of the new monetary policy perception. The prolonged period of abundant global liquidity boosted asset prices, creating a feeling of comfort which transformed into a state of ‘reform fatigue’.
In economies where QE was pursued, it was generally observed that it is not a monetary cure-all. As structural weakness started to weigh on the economy, it became clear that people had not benefited equally from these unorthodox policies. This policy-induced inequality – a strong reason for overall disappointment over QE’s effects – will need to be considered in the measures which central bankers will introduce in the period ahead.
Dealing successfully with this disappointment will be crucial for markets to move to the ‘realisation’ phase, which could broadly be interpreted as a return to market fundamentals.
Different economies are at various stages of recovery. The fear is that tapering by the leading central banks – while it might move their economies towards ‘realisation’ – could lead to negative repercussions on other countries and push some markets, especially emerging economies, into the ‘disappointment’ phase.
Focusing only on the end of QE narrows policy-makers’ perspective on exit policies. Asset markets in emerging economies will learn to navigate the consequences of the tapering, which is likely to be gradual and well communicated. It will take some time before central banks’ balance sheets shrink to pre-crisis levels, if they ever do. But there are some indirect consequences of the unconventional monetary policies which may not diminish or reverse.
Although central bankers claim that the aggregate economic benefits of their unconventional policies outweigh QE’s distributional effects, they must nonetheless address policy-induced inequality. This is not something that will improve gradually or naturally as QE ends.
Post-crisis asset price appreciation outpaced median wage growth, which is blamed as one of the key driving forces behind the rise of anti-establishment political parties in many developed countries. The shift towards political protectionism will not necessarily subside in harmony with the ending of QE. Policy-makers must be mindful of both the accountable and unaccountable impact of QE when they develop their tapering strategies.
Burcu Ünüvar is Head of the Economic Research department at the Industrial Development Bank of Turkey.