Bayoumi, Dell’Ariccia, Habermeier, Mancini-Griffoli & Valencia (IMF): Monetary Policy in the New Normal

From the Executive Summary:

The global financial crisis challenged the existing monetary policy paradigm. Before the crisis, dangerous financial imbalances grew under stable output gaps and low inflation. After the bust, a massive stimulus mitigated the downturn, but could not prevent the deepest recession since the Great Depression, as policy rates rapidly hit the zero lower bound (ZLB), and large swings in capital flows complicated macroeconomic management in small open economies. This has led to an intense discussion about what shape monetary policy should take once economic conditions have settled down into the post-crisis “new normal.”

This paper reviews the current state of the debate to extract common policy conclusions where possible, and lays out the unresolved issues where extracting such conclusions is not possible. In doing so, the paper raises more questions than it provides answers:

  • Should there be new objectives for monetary policy?
  • Should current policy decision rules be reconsidered?
  • Should there be greater international policy cooperation
  • Should unconventional policy tools become conventional?
  • What are the new challenges for central bank independence?
  • What is the optimal arrangement for monetary, macro-prudential, and micro-prudential policy?

Available for download here.