☆ ☆ What exactly is « unconventional monetary policy »?

For once, the purpose of this explanation is not to simplify a concept but to shed light on the complexity of its use.

Patrick Artus gives the following definition: « Unconventional policies consist of not using bank liquidity and bank credit as a mechanism for transmitting monetary policy » (Natixis Special Report 2009 No. 28). In other words, it involves bypassing commercial banks by providing direct loans (or guarantees) to private sector borrowers. The Fed’s Commercial Paper Funding Facility between 2008 and 2010[1]is a perfect example of this.

Borio and Disyatat (2009) use this term in a broader sense, distinguishing between interest rate policy and « balance sheet » policy. According to their definition, the latter is part of an objective of « actively using the balance sheet to directly affect prices and market conditions beyond the short-term interest rate. » According to these authors, it is the specific nature of the market segment chosen by the central bank for its intervention that makes the balance sheet policy unconventional.[2]. Quantitative easing, by affecting interest rates on long-term Treasury bills, is certainly the most relevant example.

A broader definition, generally used by economists, also includes measures aimed at guiding private agents’ expectations regarding the future path of key interest rates (commonly referred to as  » forward guidance »).

What do these definitions have in common? The definition given by Patrick Artus is in fact encompassed by the second definition presented here. In fact, some (such as Patrick Artus here) apply the adjective « unconventional » to the transmission channels of the monetary policy in question, while others use it in reference to the spirit of monetary policy (as opposed to what is done in normal times).

Julien P.