This necessitated artificially undervalued exchange rates which were pegged to the dollar by means of massive accumulation of reserves. On the flip side, deficit countries relied on large capital inflows to finance excess domestic consumption and provide the overleveraged financial system with liquidity.
The report assesses how unconventional tools—including forward guidance, balance sheet policies, negative nominal interest rates, yield curve control, and exchange rate policies—have performed over the past few decades. It employs a novel approach by examining the effect on an index of financial conditions the authors construct.