Unconventional Monetary Policy: Introduction

Abstract

The world’s four major central banks have turned to new forms of monetary policy to support demand during the Global Financial Crisis.1 The conventional policy instrument of overnight interest rates was reduced to close to zero per cent within eighteen months of the crisis.2 This presents a problem of providing further stimulus by lowering interest rates; if rates turn negative then depositors always have the option of holding wealth in cash at a zero interest rate. The option of holding cash is thought to create an effective floor on interest rates known as the zero lower bound (ZLB). Central banks have had to find new ways of deploying monetary policy, popularly known as ‘unconventional’ monetary policy, to provide further stimulus subject to the ZLB.