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Normalisation of monetary policy : prospects and divergences

Author

Listed:
  • Naim Cordemans

    (National Bank of Belgium, Research Department)

  • Ide Stefaan

    (National Bank of Belgium, Research Department)

Abstract

Although the world’s leading central banks are currently still conducting a decidedly expansionary monetary policy, it can be assumed that, sooner or later, that policy will be tightened. In view of the divergent macroeconomic situations and prospects, the normalisation of monetary policy is likely to be asynchronous. The Federal Reserve’s preparations for this normalisation are now far advanced, with the estimate of excess capacity on the labour market and the likely pressure on wages and prices as crucial elements for determining the timing and pace of the exit. In the euro area, the monetary policy stance is expected to remain extremely accommodative in a climate of very low inflation which appears to be weakening the anchoring of inflation expectations to some extent. A challenge for the exit from the current policy stance is the implementation of a more restrictive monetary policy by means of higher interest rates, while the central bank reserves still contain a substantial liquidity surplus. In that connection, the Federal Reserve has now felt the need to expand its operational framework with a supplementary interest rate floor, namely the overnight reverse repo rate, in order to ensure the optimum transmission of the policy rates to market interest rates. Asynchronous normalisation of monetary policy in the major advanced economies implies risks of undesirable spillover effects. The increased synchronisation in government bond yield movements shows that the euro area could well feel the impact of any potential turmoil associated with the normalisation of monetary policy in the United States. However, it is evident that, since the end of 2013, the Eurosystem has been successful in clearly establishing the independence of its monetary policy and is managing to devise a monetary policy course in line with the euro area’s fundamentals. That is also apparent from the movement in the exchange rate since mid-2014.

Suggested Citation

  • Naim Cordemans & Ide Stefaan, 2014. "Normalisation of monetary policy : prospects and divergences," Economic Review, National Bank of Belgium, issue iii, pages 29-52, December.
  • Handle: RePEc:nbb:ecrart:y:2014:m:december:i:iii:p:29-52
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    References listed on IDEAS

    as
    1. J. Boeckx & Ide,S., 2012. "What can we and can't we infer from the recourse to the deposit facility?," Economic Review, National Bank of Belgium, issue i, pages 31-37, June.
    2. Joseph E. Gagnon & Brian Sack, 2014. "Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed," Policy Briefs PB14-4, Peterson Institute for International Economics.
    3. J. Boeckx & N. Cordemans & M. Dossche, 2013. "Causes and implications of the low level of the risk-free interest rate," Economic Review, National Bank of Belgium, issue ii, pages 63-88, September.
    4. Simon M. Potter, 2014. "Interest rate control during normalization," Speech 145, Federal Reserve Bank of New York.
    5. M. Kasongo Kashama, 2014. "The how and why of a negative rate for the deposit facility," Economic Review, National Bank of Belgium, issue ii, pages 102-111, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. M. Kasongo Kashama, 2016. "Helicopter money and debt-financed fiscal stimulus : one and the same thing ?," Economic Review, National Bank of Belgium, issue iii, pages 31-40, December.
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    More about this item

    Keywords

    central banks’ policies; open economy macroeconomics; exit str;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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