Today's unconventional central bank policies have historical precedent. One example is the suspension of convertibility of banknotes into gold by the Bank of England between 1797 and 1821. This column argues that, although there were important differences between then and now, it demonstrates that bank reputation and interaction between bank and state are vital to the success of unconventional policies. Also, short-term unconventional policies may persist long after a crisis has passed.
Patrick O'Brien, Nuno Palma, 03 September 2016
Laurence Ball, Joseph Gagnon, Patrick Honohan, Signe Krogstrup, 02 September 2016
This column presents the latest Geneva Report on the World Economy, in which the authors argue that central banks can do more to stimulate economies and restore full employment when nominal interest rates are near zero. Quantitative easing and negative interest rates have had beneficial effects so far and can be used more aggressively, and the lower bound constraint can be mitigated by modestly raising inflation targets.
Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 17 May 2016
Quantitative easing is called ‘unconventional monetary policy’, but monetary policy could get much more ‘unconventional’. Things like ‘helicopter money’, abolishing currency and negative nominal interest rates have entered the public policy debate. This column reports the views of leading experts on the future role of unconventional monetary policy, and what might be called ‘unconventional unconventional monetary policies’. Opinions are divided. There is a healthy dose of scepticism on the effectiveness of current and future policies, but also many respondents express urgency that central banks should have more policy tools to affect inflation and real activity when the need arises. Ultimately, the experts’ hesitations match those of central banks.
Paul De Grauwe, 13 May 2016
Greece may be about to get some debt relief, although there is still resistance to the idea. This column argues that the ECB has been providing other Eurozone countries with debt relief since early 2015 through its programme of quantitative easing. The reason given for excluding Greece from the QE programme – the ‘quality’ of its government bonds – can easily be overcome if the political will exists to do so. It is time to start treating a country struggling under the burden of immense debt in the same way as the other Eurozone countries are treated.
Nicholas Butt, Rohan Churm, Michael McMahon, Arpad Morotz, Jochen Schanz, 11 October 2015
We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives 'flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 23 October 2015
Will the risk-sharing arrangements within the ECB’s quantitative easing programme reduce its effectiveness? The views of leading UK-based macroeconomists are exactly evenly divided on this question, according to the latest survey by the Centre for Macroeconomics. The responses reported in this column suggest that this divergence reflects differences in views about the channels through which quantitative easing operates.
Jens Christensen, Signe Krogstrup, 10 June 2015
Quantitative easing (QE) is thought to work by reducing expected future short-term policy rates and the supply of long-term bonds. This column argues that a third channel may be at work, namely a reserve-induced portfolio balance channel. It operates through the increase in central bank reserves on commercial banks’ balance sheets and is independent of which assets the central bank purchases. Central banks can implement QE programmes through purchases of other assets than long-term bonds and still reduce long-term yields.
Urszula Szczerbowicz, Natacha Valla, 09 April 2015
Sovereign bonds are the latest and biggest quantitative easing (QE) policy conducted by the Eurozone. This column argues that instead of sovereign bonds, the Eurozone should focus on assets that are the closest to job-creating, growth-enhancing, and innovation-promoting activities. In particular, instruments issued by agencies and European institutions should be given a prominent role. But they should also be selected to promote the financing of long-term growth and jobs, not of unsustainable government expenditure.
Lars Feld, Christoph Schmidt, Isabel Schnabel, Benjamin Weigert, Volker Wieland, 20 February 2015
Claims that ‘austerity has failed’ are popular, especially in the Anglo-Saxon world. This column argues that this narrative is factually wrong and ignores the reasons underlying the Greek crisis. The worst move for Greece would be to return to its old ways. Greece needs to realise that things could actually become much worse than they are now, particularly if membership in the Eurozone cannot be assured. Instead of looking back, Greece needs to continue building a functioning state and a functioning market economy.
Francesco Giavazzi, Guido Tabellini, 17 January 2015
The ECB may soon launch QE. Two of Europe’s leading macroeconomists argue that QE is the ECB’s last anti-deflation tool – it must not be sacrificed to political expediency. The risk-sharing debate is secondary to the programme’s size and duration – one example would be €60 billion per month for one year, or until inflation expectations rose to near 2%. The ECB should also explain that no matter how well the monetary part of the programme is designed, an accompanying fiscal expansion is critical to QE’s effectiveness.
Paul De Grauwe, Yuemei Ji, 15 January 2015
The ECB has been struggling to implement a programme of quantitative easing (QE) that would successfully target deflation. The main difficulty is political, stemming from opposition from German institutions. Their argument against is that a government bond buying programme by the ECB would mix fiscal and monetary policy. This column argues the opposite – such a programme can be structured so that it does not mix fiscal and monetary policy. It, therefore, would not impose a risk on German taxpayers.
Michael Joyce, Zhuoshi Liu, Ian Tonks, 03 January 2015
Central banks in advanced economies implemented quantitative easing (QE) as a response to the Global Crisis. A key transmission mechanism of QE, emphasised by policymakers, has been the ‘portfolio balance’ channel. This column describes behaviour of insurance companies and pension funds using sectoral and micro-level data from the UK. The results show that investors shifted their portfolios away from government bonds towards corporate bonds. But portfolio rebalancing has been limited to corporate bonds and did not extend to equities.
John Muellbauer, 23 December 2014
Eurozone deflation is likely to become reality when the annual inflation figure for 2014 is announced in January. This column argues that the ECB should develop a strategy that works in the Eurozone’s unique financial setting, instead of following the Fed’s lead. The author proposes that the ECB should pursue ‘quantitative easing for the people’, such as sending each adult citizen a €500 cheque.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Luis Garicano, Lucrezia Reichlin, 14 November 2014
The ECB seems to be edging towards QE, but faces a quandary on what to buy. This proposal suggests that the ECB buy ‘Safe Market Bonds’. These would be synthetic bonds formed by the senior tranches of EZ national bonds combined in GDP-weighted proportions. The ECB would merely announce the features of the synthetic bonds it will purchase. The market would create the bonds in response to this announcement, thus avoiding new EZ-level institutions or funds.
Jean Pisani-Ferry, 07 November 2014
A triple-dip recession in the Eurozone is now a distinct possibility. This column argues that additional monetary stimulus is unlikely to be effective, that the scope for further fiscal stimulus is limited, and that some structural reforms may actually hurt growth in the short run by adding to disinflationary pressures in a liquidity trap. The author advocates using tax incentives and tighter regulations to encourage firms to replace environmentally inefficient capital.
Biagio Bossone, Thomas Fazi, Richard Wood, 01 October 2014
High debt and deflation have afflicted Japan, the Eurozone, and the US. However, the monetary and fiscal policies implemented so far have been disappointing. This column discusses the importance of helicopter money in the form of overt monetary financing in addressing these problems. Overt money financing is the policy with the highest impact in raising demand and output without increasing public debt and interest rates.
Roberto Perotti, 13 September 2014
There is a growing consensus that austerity is contributing to the Eurozone’s macroeconomic malaise, but also that spending cuts are needed in the long run to achieve fiscal sustainability. Some commentators have advocated a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts. This column argues that such commitments are simply not credible – especially given the moral hazard problem created by central bank monetisation of debts.
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Karl Walentin, 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.