Non-standard Monetary Policy

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What is a ‘Non-standard Monetary Policy’

A non-standard monetary policy —or unconventional monetary policy — is a tool used by a central bank or other monetary authority that falls out of line with traditional measures.

BREAKING DOWN ‘Non-standard Monetary Policy’

Non-standard measures fall out of the scope of traditional ways that central banks and other monetary authorities use during times of deep economic distress. During these times, most standard or conventional methods become ineffective.

Conversely, standard — or traditional — monetary policies used by central banks include open market operations to buy and sell government securities, setting the overnight target interest rate, setting bank reserve requirements, and signaling intentions to the public.

Types of Non-Standard Monetary Policies

During a recession, a central bank can buy other securities in the open market outside of government bonds. This process is known as quantitative easing (QE). This process is considered when short-term interest rates are at or near zero. It lowers interest rates while increasing the money supply. Financial institutions are then flooded capital to promote lending and liquidity. No new money is printed during this time. 

Governments can also buy long-term bonds while selling off long-term debt to help influence the yield curve. This process tries to prop up housing markets that are financed by long-term mortgage debt. 

Governments can also signal their intention to keep interest rates low for longer periods of time in order to increase consumer confidence. 

The bank can also use a negative interest rate policy (NIRP). Instead of being paid interest for their deposits, depositors end up paying institutions to hold their deposits. 

Problems with Non-Standard Monetary Policies

Non-standard monetary policies can have negative impacts on the economy. If central banks implement QE and increase the money supply too quickly, it can lead to inflation. This can happen if there is too much money in the system, but only a certain amount of goods available. Putting a negative interest rate policy can also be problematic, in that it can punish people who save by forcing them to pay for their deposits. 

Non-Standard Monetary Policies During the Great Recession

Many of these policy tools weren’t put into place until the Great Recession that hit the United States that lasted between 2007 and 2009, and the global recession that followed. The Fed put into place various aggressive policies to prevent even more damage from the economic crisis. The central bank reduced a key interest rate to nearly zero to help boost liquidity in the markets. The Fed also injected more than $7 trillion into banks in emergency loans. Similarly, the European Central Bank (ECB) implemented negative interest rates and did major asset purchases in order to help stave off the effects of the global economic downturn.