International Monetary Fund (IMF) Managing Director Kristalina Georgieva has said that additional monetary stimulus may pose important risks to financial stability, urging fiscal policy to play a significant role in the post-pandemic recovery.
“Now, many central banks are going back to the lab, reviewing their frameworks to identify innovative strategies and tools that will support the recovery from this crisis and beyond,” Georgieva said on Tuesday at an event discussing the consequences of “lower for longer” interest rates around the world.
“While new frameworks and tools may speed recovery, additional monetary stimulus may pose important risks to financial stability,” Georgieva said, adding easier financial conditions could encourage excessive risk-taking.
She said, “Monetary policymakers will need to balance a short-term boost to inflation and output against a buildup of macro-financial vulnerabilities,” reports Xinhua.
Georgieva noted that monetary policy should not and cannot do the job alone to fight the crisis and support the recovery.
“Fiscal policy has a significant role to play – policymakers have stepped up fiscal support during the crisis, and need to continue to do so to underpin a sustainable and inclusive recovery,” she said.
“The IMF is very supportive of these efforts. Finding the right policy tools and approaches to stimulate our economies, while managing the risks, is a critical endeavor,” said the IMF chief.
In a paper released Tuesday, Tobias Adrian, financial counselor and director of the IMF’s Monetary and Capital Markets Department, argued that “it is time to position the endogenous buildup of macro-financial vulnerabilities at the heart of monetary policymaking and proposes a parsimonious model to that effect.”
“There is a growing recognition, that macroprudential tools do not address all the risks to financial stability,” Adrian wrote, noting all central banks should closely monitor the endogenous path of risk in addition to the more traditional policy paths for output and inflation.
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