Helicopter money: The best policy to address high public debt and deflation
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.
The G20 leaders may well endorse a higher ‘growth target’ at their November meeting in Australia, but they will be incapable of agreeing to the monetary/fiscal policy combination that is required to substantially lift aggregate consumer demand and economic growth.
helicopter money, overt monetary financing, public debt, quantitative easing
Eurozone recovery: there are no shortcuts
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.
The consensus is increasing that austerity has not worked – Europe stands on the edge of deflation and suffers from a deficit of demand. A recent VoxEU proposal (Giavazzi and Tabellini 2014) offers a solution that is widely shared on both sides of the Atlantic – all Eurozone countries should cut taxes simultaneously by 5% of GDP, and the ECB should buy the extra debt without sterilisation. This should be accompanied by a credible plan to reduce government spending in the future.
Macroeconomic policy Monetary policy
austerity, eurozone, monetary policy, helicopter money, quantitative easing, QE, stimulus, fiscal consolidation, fiscal policy, spending cuts, fiscal sustainability, debt monetisation
Is the ECB doing QE?
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.
The 4 September announcement by Chairman Mario Draghi has been greeted with enthusiasm by the markets and the media. It has been long awaited, and many believe that the ECB has finally delivered. This is not sure. The ECB intends to buy large amounts of securities backed by bank lending to households (mortgages) and to firms.
Exchange rates Financial markets Monetary policy
quantitative easing, QE, monetary policy, unconventional monetary policy, ECB, securitisation, bank lending, Europe, eurozone, Subprime, stress tests, deleveraging, recapitalisation, depreciation, exchange rates, euro, central banking
Quantifying the macroeconomic effects of large-scale asset purchases
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.
Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.
Global crisis Monetary policy
monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis
To exit the Great Recession, central banks must adapt their policies and models
Marcus Miller, Lei Zhang 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.
For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:
Global crisis Macroeconomic policy Monetary policy
Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy
How to jumpstart the Eurozone economy
Francesco Giavazzi, Guido Tabellini 21 August 2014
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
The mantra is that once again it is up to the ECB to save the Eurozone. Quantitative easing is the last policy tool available to jumpstart the Eurozone economy. The longer the ECB waits before starting to buy government bonds, the further away will the recovery be. This analysis, however, overestimates the power of monetary policy.
Europe's nations and regions Macroeconomic policy
ECB, monetary policy, fiscal policy, quantitative easing, public debt, aggregate demand, Eurozone economy, stagnation
Identifying and quantifying monetary policy transmission through bank balance sheets
Kaoru Hosono, Daisuke Miyakawa 09 August 2014
In the wake of the Global Crisis, several central banks have adopted unconventional monetary policies. This column presents new evidence from Japan on the transmission of monetary policy through banks’ balance sheets. Overall, the evidence suggests that bank net worth affects loan supply, that the effect depends on monetary policy and economic growth, and that this bank balance sheet channel has a significant impact on firms’ financing and investment. Exiting from unconventional monetary policies when bank balance sheets are weak could thus have a severe adverse impact on investment.
How does monetary policy affect firm activities? While there is long-standing literature on this issue, the transmission mechanism of monetary policy is currently attracting renewed attention. The reason is that many central banks – including the US Federal Reserve, the Bank of England, the ECB, and the Bank of Japan – have introduced unconventional monetary policies such as quantitative easing and credit easing in the wake of the Global Crisis, and sooner or later will have to exit from these policies.
Financial markets Global crisis Monetary policy
monetary policy, Japan, global crisis, quantitative easing, unconventional monetary policy, balance sheets, financial accelerator, credit easing, bank lending channel
What are the macroeconomic effects of asset purchases?
Martin Weale, Tomasz Wieladek 10 June 2014
After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.
After policy rates fell close to zero in response to the global financial crisis of 2008-09, the scope for further conventional monetary policy easing was exhausted. As a result, both the Bank of England and the Federal Reserve embarked on large-scale asset purchases of government and financial securities (see Figures 1 and 2).
inflation, Federal Reserve, Phillips curve, Bank of England, quantitative easing, unconventional monetary policy, output
ECB: An appropriate monetary policy
Mickey Levy 16 May 2014
As banks repay their loans from the Long-Term Refinancing Operation, the ECB’s balance sheet is shrinking. This column argues that, given the slow recovery and sustained low inflation, the ECB should replace its bank lending programme with quantitative easing. Buying short-term government debt would be consistent with the ECB’s inflation target, would keep the ECB’s monetary policy separate from its role in bank supervision, and would create a built-in exit strategy from unconventional policy.
Europe’s modest economic recovery and uncomfortably low inflation put the ECB in a bind. Although economic conditions are improving gradually (European Commission 2014), concerns about the potentially negative impacts of deflation persist (Armstrong et al. 2014). The ECB’s top near-term priorities are to avoid deflation (and apparently even sustained low inflation) and extend the economic recovery.
ECB, eurozone, monetary policy, quantitative easing, bank lending
Considering QE, Mario? Buy US bonds, not Eurobonds
Jeffrey Frankel 24 March 2014
The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% Eurozone-wide, then the periphery countries have to suffer painful deflation.
Macroeconomic policy Monetary policy
ECB, euro, quantitative easing