Armstrong And EbEll UnconvEntionAl monEtAry policy: introdUction r1 *National Institute of Economic and Social Research and Centre for Macroeconomics. E-mail: a.armstrong@niesr.ac.uk or m.ebell@niesr.ac.uk. The authors are supported by the Economic and Social Research Council through its Centre on Constitutional Change. UNCONVENTIONAL MONETARY POLICY: INTRODUCTION Angus Armstrong and Monique Ebell* The world’s four major central banks have turned to new forms of monetary policy to support demand during the Global Financial Crisis. 1 The conventional policy instrument of overnight interest rates was reduced to close to zero per cent within eighteen months of the crisis. 2 This presents a problem of providing further stimulus by lowering interest rates; if rates turn negative then depositors always have the option of holding wealth in cash at a zero interest rate. The option of holding cash is thought to create an effective foor on interest rates known as the zero lower bound (ZLB). Central banks have had to fnd new ways of deploying monetary policy, popularly known as ‘unconventional’ monetary policy, to provide further stimulus subject to the ZLB. Central banks have also carried out many other interventions, from buying private or risky sovereign securities (accepting credit risk), to direct liquidity and solvency support to institutions and markets and implementing government guarantees to support lending. These interventions directly involve credit risk and so can be considered as distinct from monetary policy. The Bank of England (the Bank) and the European Central Bank (ECB) have been particularly keen to maintain this distinction. 3 Yet the validity of the distinction is unclear; monetary policy infuences the risk premia on assets with consequences for fnancial stability; fnancial stability policies infuence the transmission mechanism for monetary policy; and income from unconventional monetary policy is counted as a fscal revenue. In this issue of the Review, we accept this distinction of unconventional monetary policies from other measures taken by central banks. In particular, three types of unconventional policies have been widely used by the major central banks. First, forward guidance was introduced by the US Federal Reserve (the Fed) in December 2008 and has since been used by all four major central banks. 4 Second, all four central banks have engaged in large asset purchase programmes through the creation of bank reserves, known as quantitative easing (QE). Finally, there is a healthy debate about whether nominal interest rates can, in fact, safely be set substantively below zero per cent. Four European central banks have now introduced negative policy rates without any obvious sign of instability. When assessing the suitability of unconventional monetary policies we face the quandary that mainstream economic models (e.g. New Keynesian) offer little rationale for intervening. According to these models the current interest rate and expected path of future interest rates fully encapsulates the impact of monetary policy on the economy. Unless unconventional monetary can change expectations about the future path of policy then there is no channel to infuence the economy. Bernanke (2014) remarked that that QE “works in practice, but does not work in theory”. 5 However, these strong results are generated in models that generally have no meaningful fnancial sector and assume that agents such as central banks can fully commit to policy targets. The fnancial sector continues to be underplayed in economic models and in practice. Its absence may lead to misleading assessments of the effectiveness of unconventional monetary policies. An ‘unconventional’ history While theory may not be much of a guide for unconventional policies, there is a rich history of intellectual debate on the appropriateness of such measures. During the Great Depression all three unconventional measures were widely debated. Indeed,