Speech

New Monetary Policy Tools for Emerging Market and Developing Economies

December 2, 2021

Dear friends and colleagues, I am very pleased to welcome you to this panel discussion on the use of new monetary policy tools in emerging markets and developing economies, or EMDEs. I would especially like to welcome our esteemed panelists, South African Reserve Bank Governor Lesetja Kganyago, Bank of Russia Governor Elvira Nabiullina, and World Bank Chief Economist Carmen Reinhart, as well as our moderator Tobias Adrian, who of course is the IMF’s Financial Counselor. I am very much looking forward to hearing their views this morning, and I am most pleased to have the opportunity to provide some opening remarks.

Unconventional monetary policies—including asset purchases—have been used extensively in advanced economies for some time, especially in the aftermath of the global financial crisis. These policies have helped to ease stress and improve market functioning. But in an environment where interest rates were constrained by the effective lower bound, large-scale asset purchase programs also importantly aided monetary policy transmission and provided needed stimulus to support faster recoveries and boost inflation toward central bank targets. 

Since the pandemic, we’ve seen many EMDE central banks joining their advanced-economy counterparts in deploying asset purchase programs, along with other unconventional policies. But since most of them still have room to cut interest rates, the range of policy tools has been narrower—little reliance, for instance, on negative interest rates—and the motivation for the use of these tools has been related more to easing financial stresses than to providing macro stimulus.   

So far, at least, these ventures into unconventional policy seem to have been quite successful. EMDE central banks have managed to lower government yields and significantly reduce financial market stress, while avoiding noticeable capital outflow and depreciation pressures, which was a concern that often held them back from using these tools in the past. Given this overall positive experience, it seems likely that EMDE central banks may consider asset purchases during future episodes of market turbulence.

But we should be cautious and remember that our experience with asset purchase programs is still relatively limited. Moreover, these policies also come with considerable risks, some of which may be accentuated in the EMDE context given their often more limited market depth and less well-developed institutional frameworks. I want to highlight three risks in particular:

• First, EMDE central banks will have to decide on how much maturity, credit, and exchange-rate risk they are willing to take upon their balance sheets.
• Second, they will have to consider the risks of fiscal dominance that may be associated with large-scale purchases of government securities (especially if done on the primary market), as well as the broader governance challenges and political pressures that may emerge if central banks support nonbank financial institutions, or set up funding for lending programs aimed at supporting particular sectors.
• Finally, many central banks must now address the challenge of exiting from these programs without triggering financial market instability and without running afoul of political pressures to minimize Treasury borrowing costs—political pressures that are likely to be all the more acute in the current environment of rising interest rates and high public debt. 

In short, the key question is whether and how EMDE central banks can benefit from asset purchase programs—and possibly other unconventional tools—while containing risks in the three areas I just mentioned. A recent IMF departmental paper led by Tobias and colleagues provides some important insights, but this is going to be a continuous learning process.

It is very much in this spirit that my MCM colleagues have organized the discussion here today, and I am most interested in the insights that the panel will bring to bear on this important and complex topic.

Thank you.