Interest rates, for a variety of reasons mostly outside the realm of monetary policy, have declined substantially since the 1980s.4 This implies that central banks have less conventional policy space when confronted with a recession. In order to provide additional accommodation with policy rates at the effective lower bound, central banks have developed and employed unconventional monetary policy instruments.
And with unconventional monetary policy instruments comes the third challenge. Despite the experiences gained in recent years, our understanding of unconventional tools like forward guidance, asset purchases and long-term credit operations is still less developed than our understanding of conventional tools. Hence, the impact of these instruments remains subject to considerably more uncertainty than that of conventional instruments.