Here we are fortunate to have among the presenters Dimitri Vayanos, Gautti Eggerston, and Eric Swanson, all accomplished scholars who have dedicated an important part of their research in recent years to delve deeper into the quantitative effects of such policies. The second session deals with the financial stability considerations of these measures. After all, to date several unconventional policy efforts have begun in Japan, the US, Europe and elsewhere, but none has so far ended –in short, we are not out of the woods yet, and claiming success might still be a bit preliminary. The concern is that while an ambitious program of asset purchases might be welcome by different investor classes as asset prices are pushed upwards, it might prove much more difficult to orchestrate an orderly retreat which inevitably relies on increasing discount rates at which future income streams are priced. This is particular true if some projects were only funded to begin with due to the exceptionally low interest rate environment, and/or if such investments were intermediated by fund managers who care not only about income streams, but also (and mostly) about short-term price fluctuations. Here we will have an interesting discussion including papers by Stephen Morris, Michael Woodford, and Gustavo Suarez, which will enlighten us about the theoretical aspects to keep in mind when evaluating the broader consequences of asset purchase programs, as well as the empirical evidence regarding the effects of the risk-taking channel on the quality of loans originated.
First, in response to the Global Financial Crisis of 2008 the Bank increased the supply of liquidity in pesos and dollars – through repos and swaps –, augmented the extensions of the swap program, and broadened the range of eligible collaterals. They were all measures designed to align market rates with the Monetary Policy Rate and to mitigate foreign currency liquidity tensions. Forward guidance was also an important tool. With the Monetary Policy Rate close to zero – we cut the interest rate from 8.25% to 0.5% in less than a year – , communicating that we planned to keep a very low short-term interest rate for an extended period of time. This was essential in keeping medium and long term interest rates low. These measures – as well as some other more exogenous developments such as the rapid recovery of commodity prices – allowed the economy to rebound quite fast from a mild recession in 2009. Actually, in the post-crisis years GDP growth was above 5% in a context of low inflation. Over time, these measures were eliminated, but certainly the lessons we learned from the crisis have been incorporated into our policy analysis and toolkit. Among the most significant I would mention two: First, the fact that the central bank must be rapid to respond and use all the available tools if necessary.