Definition of unconventional monetary policy

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What is unconventional monetary policy?

Unconventional monetary policy is a set of measures taken by a central bank to bring an end to an exceptional economic situation. Central banks use these measures only if conventional monetary policy instruments (policy rates, minimum reserves, open market operations) fail to achieve the desired effect.

Why use unconventional monetary policy?

Unconventional monetary policy measures are supposed to be temporary. Their objective is to address the failure of conventional instruments in the money supply control to be capable of influencing credit expansion again. The ultimate goal is that the central bank has a renewed impact on economic growth, the inflation rate and market liquidity.

Unconventional monetary policy tools can be used in 2 cases:


Risk of deflation

: The situation in Japan, which has experienced a decline in prices for several decades, is an example to be avoided at all costs for central banks. It is very difficult to pull out of deflation. If the inflation rate remains close to 0 for too long or inflation is negative over a quarter, central banks often use unconventional monetary policy instruments.


Major economic crisis

: To quickly recover growth after a major economic crisis (subprime crisis in the United States) or in the event of a prolonged recession (case in Japan), central banks are pulling out the heavy artillery to try to support economic activity and create jobs.

Unconventional monetary policy instruments


Asset purchase program

: This is the main instrument of a central bank's unconventional monetary policy. It is more commonly referred to as quantitative easing. This consists in the central bank massively buying securities so as to flood the market with liquidity, and lower futures interest rates in the long term. The objective is to facilitate access to credit for economic agents (households, companies) at a lower cost. This unconventional monetary policy instrument is used by the central bank in the event of a prolonged period of very low growth or recession, and to cope with a risk of deflation.

Asset purchases most often involve treasury bills and corporate bonds, but may also include asset-backed securities to clean up the balance sheets of commercial banks so that they can provide more loans.


TLTRO (Targeted Long Term Refinancing Operations)

: The operation consists in lending money to banks under the condition that they increase their outstanding loans to individuals and companies. If the commercial bank meets the objective set by the central bank, it benefits from a very advantageous rate on the loan repayment (the deposit facility rate, one of the policy rates). If it does not achieve its objective, it must repay the loan in full at a higher rate. This unconventional monetary policy measure provides a reason for commercial banks to open the credit floodgates. Effectively, most often, most of the liquidity received by commercial banks is used to speculate and is not ultimately injected into the real economy. The TLTRO is therefore an unconventional monetary policy measure which addresses this.


Negative interest rates

: The purpose of this measure is to charge an interest rate on amounts deposited by commercial banks with the central bank. This is the policy lending facility rate. Normally, bank deposits are remunerated. This unconventional monetary policy measure therefore makes it possible to force banks to lend to economic agents (households and businesses) rather than leaving the money doing nothing at the central bank.

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