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For release on delivery
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November 6, 2015

Unconventional Monetary Policy and Cross-Border Spillovers

Remarks by
Lael Brainard
Board of Governors of the Federal Reserve System
“Unconventional Monetary and Exchange Rate Policies”
16th Jacques Polak Annual Research Conference
sponsored by the
International Monetary Fund
Washington, D.C.

November 6, 2015

Among students of central banking, the Great Recession will be remembered in
part for the monetary policy innovation it prompted. Since 2008, we have seen several
episodes of extreme financial conditions in major economies. In many countries,
monetary policy has shouldered a large share of the policy response. Debt-deleveraging
dynamics and disinflationary pressures have confronted policymakers in several
economies with the classic challenge of providing accommodation when constrained by
the zero lower bound. In contrast to the Great Depression, a number of central banks
have found the “courage to act,” which has led to important policy innovation. While it
will take many years for rigorous research to distill the lessons from this period, I will
offer a few preliminary observations.1
The Effectiveness of Unconventional Monetary Policy
For much of the period since 2008, many economies, including the United States,
the United Kingdom, Switzerland, the euro area, and Japan, have been at or near the zero
lower bound. Many economies have experienced depressed aggregate demand and large
and persistent gaps between output and potential, which have led to significant reductions
in the level of policy rates in order to achieve full employment and target inflation.
Moreover, the neutral level of short-term risk-free rates looks to be much lower now in
many countries than it had been previously. A lower neutral rate raises the likelihood
that the requisite monetary accommodation when using conventional tools alone implies
setting the nominal policy rate below zero. With constraints on moving nominal interest
rates significantly below zero, central banks have looked to unconventional policy, such
as asset purchases.


These remarks represent my own views, which do not necessarily represent those of the Federal Reserve
Board or the Federal Open Market Committee.

-2The evidence suggests that unconventional monetary policy can be effective at
overcoming the limitations on policy at the zero lower bound by operating through
channels broadly similar to conventional monetary policy. A number of studies have
suggested that the forward guidance and large-scale asset purchases conducted by the
Federal Reserve boosted the levels of employment and inflation at a time when the level
of short-term interest rates was constrained by the zero lower bound. For example,
Engen, Laubach, and Reifschneider estimate that the Federal Reserve’s forward guidance
and asset purchase programs may have lowered the unemployment rate by as much as
1-1/4 percentage points and increased the level of inflation by 50 basis points.2
While conventional policy operates directly on the current and expected future
path of overnight interest rates, and thereby indirectly influences longer-term interest
rates, asset purchases are directly targeted at lowering yields on longer-term securities,
which continue to have positive interest rates. In the so-called portfolio balance effect,
the asset purchases reduce the supply of long-term Treasury and agency securities
available in the market, which leads investors to bid up the price of remaining securities,
thus lowering yields across a range of financial assets. Despite this difference, the
channels through which asset purchases affect the economy appear similar to those of
conventional monetary policy. The resulting reduction in interest rates spurs investment
and purchases of consumer durables, lowers the exchange rate, and increases the prices of
risky assets, such as equities.


See Eric M. Engen, Thomas T. Laubach, and David Reifschneider (2015), “The Macroeconomic Effects
of the Federal Reserve’s Unconventional Monetary Policies,” Finance and Economics Discussion Series
2015-005 (Washington: Board of Governors of the Federal Reserve System),

-3In addition, many have also emphasized an indirect effect through a “signaling
channel.” By helping to shape expectations about the expected future path of the federal
funds rate, asset purchases help reinforce forward guidance. Thus, asset purchases can
affect longer-run interest rates by lowering the expected path of short-term rates as well
as by reducing the term premium of long-duration securities.3
Spillovers from Unconventional Monetary Policy
Turning to the cross-border effects, just as unconventional policy appears similar
to conventional policy in its domestic effects, the analysis so far suggests that spillovers
from unconventional monetary policy work through the same three channels as
conventional monetary policy does.4 First, when monetary policy in one country
responds to a negative economic shock by easing, this action helps support domestic
demand, which in turn will likely lead to greater demand for the exports of foreign
countries. Second, monetary policy easing can also lead to a depreciation of the
country’s foreign exchange rate, which switches domestic expenditures away from
foreign exports. Finally, it eases conditions across financial markets in that country,


A number of observers have suggested that the market and macroeconomic effects of the initial asset
purchase programs announced at the most intense period of the financial crisis may have been larger than
the programs announced later in the recovery. The initial programs were important in bolstering
confidence broadly and supporting liquidity in financial markets. The later asset purchase programs,
particularly the flow-based program whose duration was tied to a substantial improvement in the outlook
for the labor market, were important in signaling that the Federal Reserve was committed to taking all
actions necessary to achieve its mandated objectives.
For example, see David Bowman, Juan M. Londono, and Horacio Sapriza (2014), “U.S. Unconventional
Monetary Policy and Transmission to Emerging Market Economies,” International Finance Discussion
Papers 1109 (Washington: Board of Governors of the Federal Reserve System, June),; John H. Rogers, Chiara Scotti, and Jonathan
H. Wright (2014), “Evaluating Asset-Market Effects of Unconventional Monetary Policy: A CrossCountry Comparison,” International Finance Discussion Papers 1101 (Washington: Board of Governors of
the Federal Reserve System, March),; Joshua
Hausman and Jon Wongswan (2011), “Global Asset Prices and FOMC Announcements,” Journal of
International Money and Finance, vol. 30 (April), pp. 547-71; and Reuven Glick and Sylvain Leduc
(2013), “The Effects of Unconventional and Conventional U.S. Monetary Policy on the Dollar,” Working
Paper Series 2013-11 (San Francisco: Federal Reserve Bank of San Francisco, May),

-4which can lead to financial easing in foreign markets when global financial markets are
tightly integrated.
The spillovers are likely to be more positive the greater the expansion of domestic
demand relative to the expenditure switching effect through the exchange rate and the
greater is the easing of financial conditions. The magnitude of the relative cross-border
effects from each of these three channels will depend on the size of the country that is
easing monetary policy as well as its relative weight in international financial markets.
Since 2008, changes in the stance of monetary policy in major economies have
often elicited strong reactions in other economies. Whether the global spillovers from
changes in monetary policy were viewed as benign or challenging depends on the relative
strength of the three transmission effects described earlier, the relative divergence of
conditions in foreign economies, and the flexibility of their monetary policy tools to
offset divergent spillovers.
To illustrate this point, let’s start with a case where the effect of easing through
unconventional means was broadly welcomed. From 2008 through 2009, the Federal
Reserve eased policy through cuts in its policy rate and through large-scale asset
purchases. That easing came in the context of a widespread global slump and severe
strains in global financial markets, and in these circumstances it had significant positive
international spillovers. The boost to domestic demand likely outweighed any effect via
the exchange rate and contributed to an easing of U.S. and global financial conditions.
Those positive spillovers were reinforced by widespread easing of conventional monetary
policies by central banks across the globe in response to the depressed state of their

-5In contrast, in 2010 and 2011, when the Federal Reserve undertook its second
round of large-scale asset purchases, the global reaction was mixed. By that time, several
emerging market economies were experiencing economic conditions close to full
employment and strong credit growth. For many of the countries with divergent
economic conditions, the combination of a market-based exchange rate and a firmly
anchored monetary policy framework oriented around domestic objectives was sufficient
to offset spillovers.
Others, however, saw the increased capital inflows associated with the divergence
of conditions as presenting problems for the management of their own economies. One
country in this category was China, which was experiencing an investment-led expansion
accompanied by credit expansion.
Separately, several emerging market economies with relatively flexible exchange
rates, particularly those experiencing expansions because of strong commodity prices,
saw risks from the combination of capital inflows and upward pressure on exchange
rates. Elevated inflows of foreign capital can present challenges in circumstances where
prudential oversight and control of financial markets are not fully developed. Thus,
countries such as Brazil worried that heavy capital inflows could lead to an undesirable
loosening of credit conditions and leave the economy vulnerable to rapid reversals.
In the past two years, we have seen these concerns play out in reverse. During the
“taper tantrum” in 2013 and again in recent months, an increase in expectations of policy
divergence in the United States confronted economic policymakers in emerging markets
with capital outflows and financial tightening against a backdrop of weakening economic
growth and financial imbalances. For these economies, while exchange rate depreciation

-6can help offset weaker demand for exports and tighter financial conditions, it also puts
upward pressure on inflation and may create problems for corporations with considerable
foreign-currency denominated debt. In the case of China, a previously set course of tying
the renminbi to the U.S. dollar led to an appreciation of the currency from mid-2014 to
mid-2015 in an economy that was already slowing. Attempts to offset the effects of this
undesired appreciation have had mixed results.
Discontinuity around the Zero Lower Bound
If the research is correct in concluding that the channels for spillovers do not
differ, these episodes should have played out little differently for conventional policy
changes than they did for unconventional policy. That raises the question of why
announcements of new policy actions around the zero lower bound have elicited such
intense reactions. The launch of the Federal Reserve’s second asset purchase program in
November 2010, for instance, sparked a blistering response from several foreign
policymakers. One foreign finance ministry official was famously quoted as denouncing
it as “clueless,” while others dubbed it the start of a “currency war.” Officials from
emerging markets with managed exchange rates argued that the United States “has not
fully taken into consideration the shock of excessive capital flows to the financial
stability of emerging markets.”5
The reaction was just as striking--albeit in the opposite direction--when the
Federal Reserve first announced its intention to taper asset purchases in 2013. The taper


See, for instance, Steven Hill (2010), “Germany Speaks Out,” Op-Ed, New York Times, November 13,; Jonathan Wheatley and Peter Garnham
(2010), “Brazil in ‘Currency War’ Alert,” Financial Times, September 15; and Newsmax Finance (2010),
“China: Fed Easing May Flood World Economy With ‘Hot Money’,” Newsmax Media, November 8,

-7talk coincided with a broad reassessment of prospects in several large emerging markets
in which some combination of financial, fiscal, and external imbalances had been
building for some time. Spillovers through financial channels were immediate despite
the fact that the anticipated reduction in asset purchases in the United States was expected
to take place gradually sometime in the future.
My conjecture is that the widespread perception that unconventional monetary
policy has large and disruptive spillovers may be a reflection of the discontinuity
associated with discrete policy changes at the zero lower bound, along with greater
uncertainty about the policy reaction function, rather than differences in the underlying
channels of transmission. When policy rates are in a range comfortably above the lower
bound, most of the major central banks confront a relatively narrow range of options in a
relatively familiar framework of decisionmaking and communications. By contrast, over
the past six years, decisions by major central banks to initiate asset purchases have
neither been seen nor communicated as incremental adjustments, but instead as bold new
initiatives whose cumulative intended scale, duration, or objective were announced at the
outset, often against the backdrop of a public debate about the efficacy and
appropriateness of various policy options.
For example, in its first two asset purchase programs the Federal Reserve
committed to buying $1.7 trillion and $600 billion of assets, respectively, while in the
subsequent flows-based program it committed to continuing monthly asset purchases
until the outlook for the labor market had met a target for substantial improvement.
Cumulative asset purchases averaged a little over $1 trillion per program, which
econometric estimates suggest contributed to sizable reductions in term premiums

-8embedded in long-term yields and a downward shift in the expected path of the federal
funds rate. Similarly, in 2013, the Bank of Japan announced asset purchases at an annual
pace of about 50 trillion yen and committed to continuing these purchases until inflation
had moved up to 2 percent. The European Central Bank, at the beginning of this year,
committed to buying 60 billion euros of assets each month at least through September of
next year, or until inflation is on a path to get to close to 2 percent. In all of these cases,
the policy actions themselves were large and designed to generate a significant easing in
overall financial conditions, and the announcement effect likely was amplified because
the policy reaction function around the zero lower bound was not well known and hence
was difficult to anticipate.
International Coordination of Unconventional Monetary Policy
The intense debates over cross-border spillovers of unconventional monetary
policy during the crisis naturally elicited calls for global coordination of monetary policy
to avoid beggar-thy-neighbor actions that could undermine growth globally. Recognizing
the practical limitations of such proposals, in 2013, the Group of Seven (G-7) instead
adopted a more circumscribed but achievable set of commitments. Each member
committed that its monetary policy settings--unconventional as well as conventional-would be oriented to meeting its “respective domestic objectives using domestic
instruments,” and “not target[ing] exchange rates.”6 This agreement ensured that actions
in the major advanced economies would be designed to provide accommodation targeted
to supporting domestic demand, which would in turn support global demand--in contrast


HM Treasury (2013), “Statement by the G7 Finance Ministers and Central Bank Governors,”
February 12,

-9to classical demand-sapping beggar-thy-neighbor policies designed to shift demand by
weakening the exchange rate. The agreement to use domestic policy instruments to
support domestic output and inflation objectives is likely, on net, to be an important
constraint against beggar-thy-neighbor policies, especially in the less charted territory of
unconventional policy.
Implications for the United States
Finally, it is worth considering what this implies for the United States. While
traditionally the United States is viewed more as a source than a recipient of cross-border
spillovers, recent events have demonstrated that U.S. economic and financial conditions
can be sensitive to spillovers from advanced economies as well as from major emerging
market economies. Over the past two years, we have seen divergences emerge among
major economies in domestic growth prospects and the expected direction of monetary
policy. Earlier in this period, the focus was on heightened deflationary risks in Japan and
the euro area. The policy response to these pressures and the anticipated divergence
between the policy trajectories in these economies and the United States contributed to a
10 percent real appreciation in the dollar against a basket of currencies through the spring
of this year.
More recently, growth projections have been marked down for emerging market
economies, which previously had been an important source of global growth. Increased
recognition of the risks to the outlook for major emerging market economies pushed the
dollar up further to 15 percent above its level last summer and contributed to a more
general tightening of financial conditions over the summer. Much of the focus of
investors and policymakers around the world has been on China, where the buildup of

- 10 past property bubbles, and more-recent stock market, bubbles, together with a steep runup in business debt levels and questions about the policy framework, have raised
concerns. In turn, growth has slowed both in many commodity-exporting countries
whose exports are sensitive to Chinese demand as well as many non-commodityproducing East Asian economies that are tied to China through trade and investment and
are important destinations for U.S. exports.
The feedback loop between market expectations of divergence between the
United States and our major trade partners and financial tightening in the United States
means that material restraint to U.S. conditions is already in place. Looking ahead, a
further weakening of foreign growth could pose downside risks to the U.S. outlook.
Under normal circumstances, policy in the United States could adjust to signs that
spillovers from developments abroad were affecting activity in the United States. But
with policy rates in the United States at the lower bound, the ability to offset spillovers
from adverse developments in foreign economies with conventional policy is constrained,
suggesting greater caution than normal.
In conclusion, the Great Recession has sparked innovative actions in a number of
countries that have helped monetary policy escape the constraints of the zero lower
bound. Just as it appears that unconventional monetary policy can provide
accommodation domestically similar to conventional monetary policy, so too it appears
that cross-borders spillovers work through the same channels. Nonetheless, the
discontinuity of discrete policy changes around the zero lower bound can amplify the
effects. In response to heightened sensitivity around these spillovers, countries that have
deployed unconventional policy have committed to do so in a way that targets domestic

- 11 objectives using domestic instruments, thereby helping to ensure their actions would
support rather than sap global demand.