The basic problem with expansionary monetary policies: They are effective only if they create distortions

Expansionary monetary policies have an effect on the economy via different transmission channels, but each transmission channel is effective only if it creates a distortion: The risk channel is based on a squeezing of risk premia, and therefore an abnormally low remuneration of risk; The credit channel is based on interest rates that are abnormally low relative to growth, and therefore an incentive to make inefficient investments; The asset price and wealth channel is based on an abnormally high valuation of assets (financial and real estate), and therefore on asset price bubbles; The exchange rate channel is based on a real undervaluation of the exchange rate, and therefore on a deviation from purchasing power parity. So we see that each monetary policy transmission channel is associated with a distortion. We therefore have to determine whether or not the advantage generated by the expansionary monetary policy outweighs the costs linked to the different distortions.