Gunther Schnabl on Exit Strategies from Unconventional Monetary Policy

In a recent paper, Gunther Schnabl discusses the environment that ultra-low interest rates have produced and the challenges of exiting such an environment. Schnabl brings up a number of interesting issues, including how low interest rate policies keep zombie banks alive and distort labor markets. The policies come at the expense of investment in capital goods and research and development, which fuels growth in rich countries.

Schnabl also builds on Dani Rodrik’s work by arguing that the low interest rate policy has increased income inequality, which in turn gives rise to nationalist and populist movements when the inequality is associated with increased globalization rather than central banks’ monetary policies. Populism has been an increasingly salient issue in recent years—not only in Latin America, but in Europe and the United States as well.

A significant challenge of any exit strategy is how to pair an increase in interest rates (via a reduction in the size of central banks’ balance sheets) and higher growth rates. To achieve this goal, major countries need to deregulate and free their economies in a manner that is “credible, slow, transparent, sequenced along the yield curve, and internationally coordinated” (p. 457). The Keynesian alternative of increasing spending has not provided good results. Not much more can be done on that count, since the Keynesian solution is designed for a context of low levels of government spending and debt—the opposite of the current situation.

The consequences of proposed exit strategies deserve serious attention. Schnabl’s work is a step in the right direction.