The Financial Stability Due to the Unconventional Monetary Policy

Botezatu, H. P., Diaconescu, D. R.

Abstract: Central banks in advanced economies have deployed a variety of unconventional policies during the crisis. It can be seen that the central banks have been mostly successful at achieving their objectives and that spillover to other countries have—thus far at least—been benign overall. Also it can be considered that using unconventional measures may be appropriate in some circumstances, but also they can have disadvantages and all the benefits for using such measures need to be balanced against potential costs. Prior to the crisis the monetary policy was implemented by central banks in a predictable and systematic way, and its transmission mechanism was understood by the economic agents. A transparent central bank reaction function (or broad rule) guided market expectations of future interest rates. After the crisis appeared, the central banks from developed countries applied the unconventional tools (“other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy”) to address two important objectives: first one is to restore the proper functioning of financial markets and intermediation, and second one is to provide further monetary policy accommodation. Both these objectives need to support financial stability, including the diminishing big risks in acute phases of the crisis (collapse of the financial system, depression, and deflation). This paper reviews recent experience with these policies and considers issues related to their continued use in the future in the emerging economies. It will be a tentative to explain how to avoid liquidity trap (“A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence make monetary policy ineffective”- http://en.wikipedia.org) or exit it – these also can be seen in the emerging economies in the last few years.

Keywords: Monetary policy, Financial Stability, Inflation rate, Systemic risk, Fiscal policy

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  • Botezatu, H. P., Diaconescu, D. R. (2014). The Financial Stability Due to the Unconventional Monetary Policy. International Journal of Business and Management, II(3), 11- 24.

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