macroeconomics for finance - uniwersytet...

Macroeconomics for FinanceJoanna Mackiewicz-Łyziak

Lecture 6

Unconventional monetary policy and quantitative easing• Literature:

1. Borio C., Zabai A. (2016), Unconventional monetary policies: a re-appraisal, BIS Working PapersNo 570.

2. Haldane A., Roberts-Sklar M., Wieladek T., Young C. (2016), QE: the story so far, Bank of England Staff Working Paper No. 624, October 2016.

3. Joyce M., Miles D., Scott A. and Vayanos D. (2012), Quantitative Easing and UnconventionalMonetary Policy – an Introduction, The Economic Journal, Vol. 122, Issue 564, November 2012.

4. Fawley B., Neely Ch. (2013), Four stories of quantitative easing, Federal Reserve Bank of St. Louis Review January/February 2013, 95(1)

5. Demertzis M., Wolff G., The effectiveness of the European Central Bank’s Asset PurchaseProgramme, Bruegel Policy Contribution, Issue 2016/10.

6. Mishkin F. (2015), ch. 16

7. Svensson L. (2015), Forward Guidance, International Journal of Central Banking, Vol. 11 No. S1

Unconventional monetary policy and quantitative easing• A negative shock to the economy can lead to the zero-lower-bound problem, in

which a central bank is unable to lower short-term interest rates further because they have hit a floor of zero.• Economic agents can always hold non-interest bearing cash.

• In such conditions, central banks need non-interest rate tools – unconventional monetary policy tools – to stimulate the economy.

• Unconventional monetary policy tools:

• Liquidity provision,

• Asset purchases,

• Commitment to future monetary policy actions.

Liquidity provision

Fed lending facilities to provide liquidity to the financial markets:

• Discount window expansion – in mid-August 2007, Fed lowered the discount rate to 50 bp above the federal funds rate target (earlier 100 bp); in March 2008 – to 25 bp above the federal funds rate target.• Little used

• Term auction facility – set up in December 2007 to increase borrowing from the Fed; loans to banks at a rate determined through competitive auctions.• More widely used than the discount window facility

• New lending programs – i. a. lending to investment banks, lending to promote purchases of commercial paper, mortgage-backed securities, and other asset backed-securities.

Liquidity provision

• The ECB’s response to the crisis was mainly focused on providing liquidity to the banking sector and repairing the bank-lending channel.

• Liquidity provided through: main refinancing operations (MRO), long-term refinancing operations (LTRO), at a fixed rate and full-allotment basis (subject to adequate collateral).

• Extension of the maturity of liquidity provision – the maximum maturity of LTROs was temporarily extended firstly to 6 months, then 1 year, and eventually 3 years (two massive very long-term refinancing operations).

• Banks in Spain, Portugal, Ireland, Italy and Greece accounted for 70-80% of the total borrowing since 2010.

• Measures adopted by the ECB seem to be effective in dealing with the liquidity crisis.

Large-scale asset purchases

Federal ReserveDate Program/ action Decription

25.11.2008 QE1 LSAPs announced: the Fed will purchase $100 billion in GSE debt

and $500 billion in MBS.

18.03.2009 QE1 LSAPs expanded: the Fed will purchase $300 billion in long-term

Treasuries and an additional $750 and $100 billion in MBS and

GSE debt, respectively.

11.03.2010 QE2 QE2 announced: the Fed will purchase $600 billion in Treasuries.

21.09.2011 MEP The Fed will buy $400 billion of Treasuries with remaining

maturities of 6 to 30 years and sell an equal amount with

remaining maturities of 3 years or less.

13.09.2012 QE3 QE3 announced: the Fed will purchase $40 billion of MBS per

month as long as “the outlook for the labor market does not

improve substantially… in the context of price stability”.

Source: Borio and Zabai (2016)

Large-scale asset purchases

Bank of England

Date Program/ action Decription

19.01.2009 APF APF established: the BOE will purchase up to £50 billion of

“high quality private sector assets” financed by Treasury

issuance.

05.03.2009 APF/QE1 QE1 announced: the BOE will purchase up to £75 billion in

assets, now financed by reserve issuance; medium- and

long-term gilts will comprise the “majority” of new

purchases.


assets financed by reserve issuance; the ceiling on private

assets held remains at £50 billion.


assets.


Large-scale asset purchasesEuropean Central Bank

Date Program/ action Decription05.10.2010 SMP SMP announced: the ECB will conduct interventions in the euro area public

and private debt securities markets; purchases will be sterilized.

09.06.2012 OMT OMTs announced: countries that apply to the European Stability

Mechanism (ESM) for aid and abide by the ESM’s terms and conditions will

be eligible to have their debt purchased in unlimited amounts on the

secondary market by the ECB.

04.09.2014 APP/ABSPP and CBPP3 ABSPP announced: the ECB will purchase a broad portfolio of simple and

transparent ABS with underlying assets consisting of claims against the euro

area non-financial private sector under an ABS purchase program.

CBPP3 announced: the ECB will also purchase a broad portfolio of euro-

denominated covered bonds issued by MFIs domiciled in the euro area

under a new covered bond purchase program.

22.01.2015 APP/PSPP PSPP announced: the ECB will purchase bonds issued by euro area central

governments, agencies and European institutions.


Central bank’s balance sheets

Source: Haldane et al. (2016)

Quantitative easing and credit easing

• QE describes any policy that leads to unusual expansion of the balance sheet of the central bank, particularly at the zero bound.

• Credit easing intends to reduce specific interest rates and/or improve the functioning of particular segments of the credit market.

• Credit easing can entail QE but it targets certain markets and/or interest rates.

• Former Fed chair Ben Bernanke has claimed that Fed’s policies were aimed at credit easing because the aim of Fed was improvement of the functioning of long-term bond markets and decrease of long-term interest rates rather than simply increase of the monetary base.

• Bank of England and ECB aimed at expanding reserves, which may be considered QE.

QE vs. credit easing


The transmission mechanism of unconventional monetary policy Interest rate channel

• Fawley and Neely (2013): At ZLB monetary policy can affect the economy by lowering real long term interest rates. How?

• N-year real yield on a bond:

𝑟𝑡,𝑡+𝑛 = 𝑟𝑡,𝑡+𝑛 + 𝑇𝑃𝑡,𝑛 − 𝐸𝑡𝜋𝑡,

where: 𝑟𝑡,𝑡+𝑛 is the expected real yield at time t on an n-year bond, 𝑟𝑡,𝑡+𝑛 is the average expected overnight rate over the next n years at time t, 𝑇𝑃𝑡,𝑛 is the term premium on an n-year bond at time t, and 𝐸𝑡𝜋𝑡 is the expectated average rate of inflation over the next n years at time t.

The transmission mechanism of unconventional monetary policy • Long term real interest rates may decline because:

1. expected inflation may increase,2. expected policy rate path may fall,3. the term premium may fall.

• How the central bank can affect expected inflation, expected policy rate path and term premia?

• The central bank can commit to zero interest rates for a period longer than its reaction function would suggest (policy time-inconsistent).

• QE (asset purchases and bank lending) change the central bank’s incentives through its balance sheet.

• The value of the central bank’s bond portfolio declines if long rates rise.

The transmission mechanism of unconventional monetary policy Portfolio balance channel

• Central banks can lower long-term real rates by reducing term premia through asset purchases.

• Portfolio balance channel assumes market frictions.

• Consequences:

1. There is no perfect arbitrage between long and expected short-term rates,

2. Changes in the maturity composition of nominal government debt affect asset prices.

• If the central bank purchases assets of a certain type of risk (duration), it will cause investors to demand less compensation to hold the remaining amount of that type of risk and term premia will fall. (Fawley and Neely, 2013)

The transmission mechanism of unconventional monetary policy • Demertzis and Wolff (2016) name another channel of unconventional monetary

policy – exchange rate channel.

• The increased liquidity should weaken the exchange rate thereby increasing aggregate demand.

• They find evidence of effectiveness of this channel in the eurozone – weakening of euro-dolar exchange rate (strengthened by the normalization of monetary policy in the US).

The transmission mechanism of unconventional monetary policy-exchange rate

Source: Demertzis and Wolff (2016)

The transmission mechanism of unconventional monetary policy• Haldane et al. (2016) list the following channels of transmission mechanism of

QE:

• Monetary policy signaling – QE conveys extra information about the future path of short-term interest rates;

• Portfolio rebalancing – QE induces a switch into longer duration or higher risk assets;

• Liquidity effects – QE squeezes the liquidity premium on various assets;

• Exchange rate – QE lowers the price of domestic assets relative to foreign assets;

• Confidence/uncertainty – QE reduces the amount of volatility in markets or uncertainty about the outlook;

• Bank lending – QE helps stimulate a rise in lending by banks.

The transmission mechanism of unconventional monetary policy


The transmission mechanism of unconventional monetary policy• The effectiveness of QE channels depends on existence of various frictions and

imperfections in the financial markets.

• Information frictions: These might arise from private agents having less than perfect information either about the future monetary policy reaction function of the authorities and/or about the future course of the macro-economy. This friction underlines the signalling, exchange rate and uncertainty channels of QE.

• Market frictions: These might arise from imperfect degrees of substitutability between different classes of asset, from investors having a preferred habitat for bonds of a particular duration or credit risks, or from limits to arbitrage between certain assets. This friction underlies the portfolio balance, liquidity and bank lending channels of QE. (Haldane et al. (2016)).

Effects of QE on financial markets


Effects of QE on financial markets cont.


Effects of QE on GDP and inflation


Effects of QE on GDP and inflation cont.


Forward guidance

Svensson L. 2015, Forward Guidance, International Journal of Central Banking, Vol. 11 No. S1

• Forward guidance in monetary policy means providing some information about future policy settings.

• Many central banks, e.g. the Federal Reserve, the Bank of Canada, the ECB, the Bank of England, have used different forms of forward guidance in the context of a binding zero lower bound for the policy rate. It has been used as a way of implementing more expansionary policy when the policy rate has been restricted by a lower bound.

• Some central banks use forward guidance in the form of published forecast for the policy rate (the policy-rate path) as a part of their normal monetary policy: e.g. the Reserve Bank of New Zealand from 1997, Norges Bank from 2005, Sveriges Riksbank from 2007 and the Czech National Bank from 2008.

Forward guidance

• Reasons for forward guidance in the form of a published forecast for the policy rate:• transparency

• effectiveness

• informativeness

• justification

• accountability

• Can transparency go too far?

Forward guidance – Swedish experience

The policy rate, the Riksbank policy rate path, and the market policy rate pathbefore and after the announcement

macroeconomics for finance - uniwersytet...

Documents