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Is an expansionary monetary policy effective against an exogenous negative growth shock?
If growth falls due to the usual causes ( overindebtedness , bursting of asset price bubbles), an expansionary monetary policy becomes necessary to make a high debt level acceptable, bolster asset prices and avert a banking crisis. But is an expansionary monetary policy also effective when growth falls because of an exogenous shock (such as the coronavirus crisis)? The answer is yes: debt sustainability and asset prices depend on the interest rate-growth differential ; i f the growth rate falls for an exogenous reason, the central bank must lower interest rates. This obviously creates a problem if risk-free interest rates and risk premia are already very low before growth falls. The central bank can also correct the liquidity crisis that may appear as a result of the fall in revenues by injecting more liquidity.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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