lessons from unconventional monetary policy for small open economies and emerging markets * douglas laxton chang yong rhee i feel very honored to be invited to this year ’ s jackson hole symposium, especially during this time of heightened uncertainty. the paper i ’ ll be discussing is co - authored with doug laxton. in response to an unprecedented health crisis, not only have central banks in advanced economies re - employed unconventional monetary policies ( ucmps ) that had been used extensively since the global financial crisis, but these unconventional policies can also be found in emerging market and small open economies. with stronger rebound in aggregate demand than aggregate supply, and rising prices, inflation has soared to levels not seen in recent decades. amid these abrupt changes, we were asked to discuss new constraints from the perspectives of emerging market or small open economies. to be more concrete, we would like to explore two questions : 1. what lessons should emerging markets learn from the experiences of deploying unconventional policies in advanced economies? what implications do they have on current and sudden high inflation challenges? 2. should emerging market economies use similar unconventional policies if they face strong deflationary pressure in the future? by unconventional monetary policies, we mean quantitative easing ( qe ), as well as unconventional forward guidance ( ucfg ), which is qualitative, date - based or thresholdbased forward guidance on the future paths of policy. the fed ’ s “ lower - for - longer ” expressions such as, “ at least through mid - 2015, ” or, “ at least as long as the unemployment rate remains above 6. 5 %, ” are prime examples. this contrasts with * we are grateful to dr. ahrang lee and to dr. bada han at the bank of korea for their substantive contributions and assistance in preparing this paper, and to mr. takuma hisanaga at the mof, japan, for kindly providing the data that decomposes the main drivers of japan ’ s public debt accumulation. the views in this paper do not necessarily represent the official views of the bank of korea or its monetary policy board. “ conventional forward guidance ” ( cfg ), which utilizes a comprehensive forecast of macro variables with an endogenous interest rate path that is consistent with the objectives of the central bank. how successful were ucmps in advanced economies? let me first briefly mention how successful unconventional policies were in advanced economies. as you know, major central banks began encountering their effective lower bound in the aftermath of the global financial

some cases defying the taboo of buying government debt in the primary market. such effective uses, however, might have been attributed to a common global shock. abundant global liquidity and the fact that advanced economies themselves were breaking taboos on a much larger scale might have helped emerging economies avoid being penalized by international capital markets for ultra - loose expansionary policies. it is therefore questionable whether the same results would be obtained if emerging markets alone were to face the risk of falling into secular stagnation and if they were to implement similar expansionary fiscal and monetary policies in response. constraints on ucmps in emes a more difficult question is whether emerging economies should use unconventional policies when facing secular stagnation, when global liquidity is not sufficient. the chance of returning to very low inflation and low growth is significant for korea and other asian emerging economies, such as thailand and china, considering their rapid aging and earlier experiences of low inflation. even so, unconventional forward guidance may not be a desirable toolkit for emerging markets with greater uncertainty, exacerbating the inflexibility of unconventional forward guidance to sudden economic changes and the exit problem. in addition, there are several structural factors to consider. for unconventional forward guidance to be successful, the central bank must be able to commit to the announced strategy and make a credible case that it is consistent with achieving the central bank ’ s objectives. otherwise, the central bank could be subject to aggressive speculative attacks. for example, unconventional policies trying to lower interest rates could lead to excessive depreciation of the local currency if the market perceives the policy as being inconsistent with the macroeconomic fundamentals of the country. concerns about fiscal dominance is another example. the experience of japan since the 1990s well - illustrates that the main driver of public debt explosion has been agingrelated spending, not fiscal spending to boost the economy as is commonly believed. this shows that it is not easy for emerging economies that are experiencing rapid aging, to credibly convince markets of a scenario that temporarily requires a large fiscal stimulus while promising to maintain fiscal sustainability in the long - term. an alternative conventional forward guidance so, if unconventional forward guidance is not desirable, then what are the alternatives? one option could be scenarios - based conventional forward guidance. for example, in summer last year, this framework could have been used to present different scenarios for the two clear narratives regarding inflation : persistent vs transitory. the first scenario would have assumed inflation was more persistent, requiring faster policy normalization