Thoughts: Unconventional Monetary and Exchange Rate Policies: The Final Jacques Polak Annual Research Conference Panel

Live from the Sixteenth Jacques Polak Conference: Sixteenth Jacques Polak Annual Research Conference: “Unconventional Monetary and Exchange Rate Policies”

Adam Posen: To talk about misallocation of capital and added financial risk at great length without mentioning “regulation” once. And to talk about how quantitative easing has greatly added to systemic risk when its principal disappointment has been the failure of quantitative easing to persuade pension funds and corporations to extend themselves out the yield curve.

The argument that ultra-low interest rate policies add to systemic risk seems to be based on a view that they do both of:

• inducing people to create more long-duration assets
• increasing the duration of existing assets.

And that a world with a lot of long-duration assets is one of great systemic risk.

As we move into our post-December world, the Federal Reserve will have three levers to control 2.5 dimensions of policy:

• The federal funds rate.
• The rate of interest on reserves.
• The size of its balance sheet.

What is our thumbnail measure of monetary policy in such a world?