OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

The Benefits and Costs of Highly Expansionary Monetary Policy

How far to go – and to remain – in the direction of highly expansionary monetary policy hinges on the
balance of marginal benefits and costs of additional monetary easing and its expected evolution over time.
This paper sketches a framework for assessing this balance and applies it to four OECD economic areas:
the euro area, Japan, the United Kingdom and the United States. The effectiveness of further stimulus via
quantitative easing or forward guidance in affecting asset prices, interest rates and credit flows will depend
on the state of the economy and the functioning of financial markets. Marginal costs could rise due to
excessive risk-taking; higher inflation expectations; higher likelihood of ever-greening; and higher risks of
financial instability in the exit phase, especially when exit from monetary accommodation is close in time
and signs of negative effects are already apparent. The balance of marginal benefits and costs is found to
be different across the main OECD areas. In the United States, the case for additional stimulus is
weakening, while the opposite is true for the euro area and Japan. In the United Kingdom, the assessment
is less clear cut.


Keywords: spillovers, monetary policy, quantitative easing, asset price booms, forward guidance, ever-greening

G21: Financial Economics / Financial Institutions and Services / Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
F32: International Economics / International Finance / Current Account Adjustment; Short-term Capital Movements;
E44: Macroeconomics and Monetary Economics / Money and Interest Rates / Financial Markets and the Macroeconomy;
E31: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Price Level; Inflation; Deflation;
G12: Financial Economics / General Financial Markets / Asset Pricing; Trading volume; Bond Interest Rates;
F31: International Economics / International Finance / Foreign Exchange;
E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects;
E5: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit