The Bank of Japan has been pursuing quantitative and qualitative monetary easing since 2013, but has failed to achieve its target of a stable 2% inflation rate. This column explores the Bank’s recent practices and performance, and identifies four structural factors that have contributed to the limited impact of unconventional monetary easing on aggregate demand and inflation. The Bank now needs to come up with more objective projections for the timing of achieving its price stability target.
Sayuri Shirai, 16 March 2017
Ricardo Reis, 14 October 2016
Conventional economic theory predicts that, outside of a financial crisis, quantitative easing should have no effect on real outcomes or inflation. This column proposes two theoretical channels through which quantitative easing might also work in a fiscal crisis. In this case, quantitative easing can be a valuable tool because it can control the path of inflation over time and reduce the distortions to the credit flow in the economy.
Marco Di Maggio, Amir Kermani, Christopher Palmer, 07 October 2016
When the financial sector is constrained and monetary stimulus is needed the most, flattening the yield curve is not enough – quantitative easing affects the real economy through a direct-lending channel that depends crucially on the type of assets purchased. This column argues that the Fed’s decision to purchase mortgage-backed securities (rather than exclusively Treasuries) during its first phase of quantitative easing increased mortgage-refinancing activity by $600 billion and had significant effects on aggregate consumption. It also highlights an important complementarity between quantitative easing and countercyclical macroprudential policies such as loan-to-value ratio caps.
Minouche Shafik, 25 June 2015
UK long-term yields are extraordinarily low. This could be interpreted as financial markets expecting prolonged low growth or low inflation, or both. This column argues that this view is overly gloomy. Factors pulling down today’s inflation are unlikely to be permanent, and the economic headwinds should ease gradually. Additionally, a return to productivity growth should facilitate faster potential output growth over the long term. A more likely interpretation is that low yields reflect precautionary actions by public and private financial-market participants to reduce vulnerabilities to adverse outcomes.
Jagjit Chadha, 02 November 2014
The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.
Carlo Favero, Francesco Giavazzi, 21 January 2008
The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are more important than country-specific, thus it is not surprising the European Central Bank (ECB) use models to study optimal monetary policy in the Euro area assuming it works essentially as a closed economy, hit primarily by domestic shocks. The authors of CEPR DP6654 explore the variable most directly related to current and expected monetary policy, the yield on long-term government bonds, and determine whether the response of long-term rates is consistent with a closed economy.
Charles Goodhart, 24 September 2007
Recent research suggests that the additional predictive power of the yield curve – beyond the information in other macroeconomic variables – often appeared during periods of uncertainty about the underlying monetary regime. This is true, for example, of the US during the Volcker disinflation episode.