I believe the LSAPs conducted by the Federal Reserve have had substantial beneficial effects on the U.S. economy and that the objections that have been raised against them are not convincing. Forward guidance about the future policy rate has been used as an unconventional tool in statements by the Bank of Canada, the Bank of Japan, and the Federal Reserve during the crisis. However, forward guidance in the form of published policy-rate forecasts have for several years been a conventional policy instrument for the Reserve Bank of New Zealand, Norges Bank, the Riksbank, and the Czech National Bank. I have long been in favour of the publication of a policy-rate forecast on a regular basis, based on both the existing practical experience of publishing such forecasts and the fact that what matters for the economy and private-sector decisions is not what the policy rate is during the one or few months until the next policy meeting but what the longer interest rates are. These longer rates result from market expectations of future policy rates and term premiums. Publishing a policy-rate path would be the most direct way to affect interest-rate expectations, especially since central banks should have better information about their own intentions than anyone else. Based on the observation that emerging-market economies have received large capital inflows lately, with risks of bubbles and other negative effects, some observers suggest that the effects on capital flows to other countries should be taken into account when, for instance, the Federal Reserve sets its monetary policy.

Specifically, we call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies.”  6  Ferrero, Gertler, and Svensson (2009) provide a suitable model for such thought experiments, a New Keynesian DSGE model of a world with two large countries and tradable and nontradable goods. BIS central bankers’ speeches  7  foreign economy. Everything else equal, this has two consequences for the domestic economy. First, due to increased foreign activity, foreign demand for domestic exports increases somewhat. Second, the interest-rate differential between the domestic and foreign interest rates increases. This will trigger an incipient capital inflow into the domestic economy and appreciation of the domestic currency. Suppose the appreciation is so large as to trigger depreciation expectations that balance the increased interest-rate differential. This will again stabilise the capital flow at zero. Everything else equal, the appreciation of the currency is a real appreciation, which is contractionary for the tradable-goods sector. Assume that this contractionary effect dominates over the initial increase in export demand, so the net effect on the tradable-goods sector is contractionary. Demand for, and the output of, nontradable goods may expand somewhat from the appreciation, but assume that the contraction of the tradable-goods sector dominates so the net effect on domestic output is a contraction. The appreciation also leads to lower inflation, through lower prices on imported goods.