Adverse Effects of Unconventional Monetary Policy

Following the recent waves of financial crises in the advanced economies and a prolonged period of low interest rates, major parts of the world economy are experiencing low growth, a rise in financial volatility, and low rates of inflation. Specifically, in Japan and in large parts of the eurozone the crises persist. In large parts of the world, unconventional monetary policies—that is, ultra-low interest rates and large-scale asset purchases, also known as “quantitative easing” (QE)—are seen as important determinants of employment and growth. The announced exit from unconventional monetary policy in the United States, where growth appears more robust, has clouded the growth perspectives of many emerging market countries. The Chinese growth engine, which was a main driver of world growth during the 2000s, has begun to stutter—and emerging market corporate bond markets have come under pressure. Macroeconomists have identified several reasons for the recent wave of financial crises in the advanced economies. One strand of literature explains financial crises as result of a random or exogenous shock, amplified by the irrationality of human action (Keynes 1936, De Grauwe 2011), asymmetric information and financial constraints