In an exclusive interview with The Australian and The Wall Street Journal, Mr Stevens, who stands down as Reserve Bank governor next month, said the unconventional methods applied by central banks worldwide had also failed to provide the long-term boost to demand that was sought.

While he does not think the nature of those unconventional strategies has added to financial stability risks, the length of time they have been applied raises the likelihood of financial dis­ruption when they are eventually ­withdrawn.

Mr Stevens said attempting to contain the growth in credit with regulatory tools over the long term, while operating with low interest rates, would eventually fail.

“That’s really what we were trying to do in this country for quite a long time up until financial deregulation occurred,” he said.

“If we sought to contain credit growth for a lengthy period with regulatory tools, we probably would end up relearning those lessons.”

PDF: Glenn Stevens interview in full

Over the shorter term, efforts by the Australian Prudential Regulation Authority and Australian Securities & Investments Commission to rein in the growth of housing credit are working.

“I would say that the things that have been done have probably been more effective than I had hoped at the margin, so that’s good,” Mr Stevens said.

But he said the most effective step was APRA’s insistence that institutions raise their lending standards, rather than the more publicised 10 per cent cap on growth in investor loan portfolios.

“That’s been of more durable value, and that of course is worth doing anyway regardless of the macroeconomic situation,” he said. “So in a way, that’s saying we’re believers in proper, ­rigorous supervision and we always have been.”

Mr Stevens said central banks had been grappling with how to lift demand ever since the immediate stability demands of the financial crisis passed.

“That is where the more unprecedented things have really been done and where there’s room for debate about how effective we could ever have expected that all to be,” he said.

“I don’t think you could say that the Federal Reserve or the Bank of Japan or the Bank of England or the ECB, and maybe some others, were negligent in trying to think about new things they could do to help,” Mr Stevens added. “The evidence is that they’ve been pretty inventive, actually, in deploying balance-sheet tools and even most recently negative ­interest rates.”

Mr Stevens said the core problem was that the crisis had left ­excessive debt among banks, ­governments and borrowers.

“The central bank can help in the deleveraging process. It can bring rates down to speed up the adjustment, but it can’t magically wave away the leverage that was there that people have to fix.

“When you’re tightening you can always find an interest rate that’s high enough that you’ll stop them from borrowing, but when you’re cutting, you can’t assume there’s a rate low enough that will restart it all, particularly if they started with too much debt to begin with.”

Mr Stevens said the US Federal Reserve had thought carefully about the risks to financial stability from the quantitative easing program under which it has built up a portfolio of more than $US4 trillion ($5.2 trillion) in government and mortgage bonds.

He said the risks when the Fed eventually signalled that it intended unwinding its bond portfolio would be the same as the market’s reaction when, in May 2013, its then chairman Ben Bernanke said he was preparing to “taper” bond purchases, leading to a spike in global long-term interest rates.

“If investors have taken on leverage or taken on risk with ­unrealistic expectations, and then those expectations are dashed, well, that could in principle result in abrupt changes to capital ­market pricing,” he said.

“It’s not as though we’ve never seen that before. It would simply be the sheer length of time that these unconventional and exceptional policies have been in place, maybe. That’s probably the issue.

“I suspect there will be some disorderly things happen somewhere. The real question isn’t whether that occurs, it’s whether it proves to be very damaging or not, and I don’t think we can know at this stage.”

While the extent of any market reaction is impossible to predict, Mr Stevens said it would be welcome if the Fed did press ahead with lifting rates. He believed the global economy could manage the fallout.

“I can’t see why the global economy is really any less ready for number two than it was for number one. It’s as ready as it has ever been in any of the other ­episodes,” he said.

He said he understood the caution of Fed chairwoman Janet Yellen. “I’m not among those who want to criticise Janet Yellen for doing their job. It’s always hard to raise rates anywhere.”

He accepted the Fed’s logic that the risks of lifting rates too soon or too late were not ­symmetrical.

“The scope to ease again and to restart the recovery if it faltered is considerably smaller than the scope to tighten if you end up ­seeing inflation.”

He said the world economy would not return to the conditions that prevailed before the financial crisis, but there had to be an end to the exceptional period of such stimulatory monetary policy.

“People understand the way the Fed is thinking about the economy: they understand there’s going to have to be a return to ­normal. Normal is not the same place now, but people know that ­normal isn’t here.”