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Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?
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Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Stephen Cecchetti, Tommaso Mancini-Griffoli and Machiko Narita
IMF, 2017
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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Well Structured

Recommendation

The Federal Reserve found itself between a rock and a hard place following the 2008 financial crisis. The central bank’s unusual actions and extraordinary monetary policy accommodation no doubt helped prevent a greater economic calamity, but there is some question about whether the Fed may have also unwittingly stoked financial institutions’ risk-taking tendencies. Economists Stephen Cecchetti, Tommaso Mancini-Griffoli and Machiko Narita’s overview of whether financial institutions have taken on excessive debt in response to the availability of easy money sheds some much-needed light on this important issue, although their report does not come up with any definitive conclusions about the impacts of heightened risk-taking. getAbstract suggests this succinct, topical report to policy experts, economists and financial services professionals.

Take-Aways

  • While the Federal Reserve’s monetary policy easing following the 2008 financial crisis likely warded off a full-fledged depression, the accommodation raised questions about its potential fallout on the economies of the United States and other countries.
  • The Fed’s actions led financial institutions around the world to increase their leverage.
  • The Fed’s effects on financial institutions outside the United States were greater than those of their own central banks’ policies.

About the Authors

Stephen Cecchetti is a professor at Brandeis International Business School. Tommaso Mancini-Griffoli and Machiko Narita are IMF economists.

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