The limits of monetary policy

The major advanced economies are maintaining extraordinarily accommodative monetary conditions, which are being transmitted to emerging market economies (EMEs) in the form of undesirable exchange rate and capital flow volatility. As a consequence of EME efforts to manage these spillovers, the stance of monetary policy is highly accommodative globally. There is widespread agreement that, during the crisis, decisive central bank action was essential to prevent a financial meltdown and that in the aftermath it has been supporting faltering economies. Central banks have had little choice but to maintain monetary ease because governments have failed to quickly and comprehensively address structural impediments to growth. But the need for prolonged accommodation has to be carefully weighed against the risk of generating distortions that will later produce financial and price instability.