'Low for Long' and risk-taking

Departmental paper No. 2020/25

Format:

Corporate Author:

International Monetary Fund Monetary and Capital Markets Department

Author:

Tobias Adrian

Publisher:

IMF

The COVID-19 pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies, including 'low for long' interest rates and asset purchases, increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increase medium- and long-run macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice