After the outbreak of the international financial crisis, the central banks of various economies have introduced a new set of policy interventions to cope with the crisis and the challenges of the affected economic environment. These measures are collectively referred to as the Unconventional Monetary Policy Tool (UMPT), which undertakes two tasks of providing the economy with further monetary stimulus and solving the problem of poor monetary policy transmission. In some respects, these unconventional monetary policy tools are no different from traditional tools. The biggest difference is the scope and scale of use of the tool, which has also become an important indicator to distinguish whether the policy is conventional.
Unconventional monetary policy tools and their effects
Unconventional monetary policy tools and their effects
We divide unconventional monetary policy tools into four categories, namely ultra-low policy interest rates, large-scale Refinancing operations, asset purchase plans and forward-looking guidance.
Moderately negative interest rate Policy Help to achieve the central bank ’s goals
Moderately negative interest rate Policy Help to achieve the central bank ’s goals
International financial crisis Previously, the effective lower bound of the policy rate was generally considered to be higher than zero, on the grounds that it was constrained by the cost of holding cash and the profitability of financial institutions. However, after the crisis, as countries continued to loosen their policies, many countries entered the negative interest rate range. In this situation, the negative interest rate policy proved to be effective. The reason for the negative interest rate policy is unconventional. First, it subverts the traditional understanding of the central bank’s payment of reserve interest, and second, it breaks the market’s expectations of lower interest rates.
Negative interest rate policy works through the same channels as traditional monetary policy, and currently the negative effect is still very small. Negative interest rates have a significant effect on lowering the interest rate in the money market, have a positive effect on inflation and the improvement of the overall economic situation, and can also increase the borrower ’s solvency. The side effect of the negative interest rate policy is firstly to narrow the bank’s interest margin and reduce profitability. However, the reduction in the non-performing loan ratio in a low interest rate environment can also increase bank income, so it has not had a significant impact on the robustness of the banking system. In addition, lowering the interest rate below the previous effective interest rate lower bound will bring exchange rate depreciation pressure, and the transmission of negative interest rates to most market interest rates is not completely smooth, only to specific types of accounts such as governments and large companies However, some long-term potential side effects cannot currently be accurately assessed.
Large-scale refinancing operations are an effective way to provide liquidity
Large-scale refinancing operations are an effective way to provide liquidity
Most central banks can activate emergency loan instruments to provide liquidity to institutions with good collateral according to specific circumstances, but are limited by the scope and total size of qualified counterparties, The period is also shorter. After the international financial crisis, the loan instruments used or created by the central bank broke through these restrictions, providing more liquidity to a wider range of institutions with more lenient conditions, longer maturities, and lower interest rates. Physical department. Refinancing operations are not innovative in nature, but they are unprecedented in terms of operation methods, scope and scale. In the refinancing operation, the central bank can flexibly choose the amount or price to respond to the two different problems of market failure and lower effective interest rate.
13 central banks around the world adopted large-scale refinancing operations in 2007 and 2008 to ease liquidity tensions, repair monetary policy transmission channels, and reduce bank financing pressure. The use of these tools has reduced liquidity and risk premiums, while also relaxing the financing environment. From the evaluation results, even under the constraint of the effective interest rate lower bound, providing more monetary incentives is also crucial to the credit expansion of the real economy. The negative effects of large-scale refinancing mainly include the excessive reliance of financial institutions on central bank liquidity, the disintermediation of financial markets, the inefficiency of credit lending and the reduced willingness of the private sector to deleverage.
The asset purchase plan reduces the risk premium and has a certain negative impact.
The asset purchase plan reduces the risk premium and has a certain negative impact.
Large-scale asset purchases by the Central Bank will directly affect asset prices, reduce relevant interest rates and The risk premium can therefore bypass the blocked transmission chain and reduce the financing costs of the physical sector. The asset purchase plan to buy safe assets from investors can also have a substitution effect, stimulate demand for risky assets, and relax financial conditions. Asset purchase can also be used to solve two problems: market failure and effective interest rate lower bound.
The survey found that 7 central banks have adopted large-scale asset purchase plans with different objectives and characteristics: from 2008 to 2012, 19 measures were adopted to improve market functions. The purchase plan has effectively reduced the risk premium and improved the market environment; from 2009 to 2016, 18 purchase plans were implemented to relax the monetary policy, which is larger and lasts longer, but there are differences in effectiveness. Overall, asset purchase plans have achieved remarkable results in affecting market prices, especially yields, but there are still uncertainties in affecting actual economic variables such as output and inflation. Possible negative effects of asset purchase plans includeThe liquidity of the debt market has declined, the central bank’s balance sheet has deteriorated, the money market has shrunk, the gap between the rich and the poor has widened, and international spillovers have been seen.
The central bank of each economy indicates that the forward-looking guidance works better
The central bank of each economy indicates that the forward-looking guidance works better
The forward-looking guidance aims to show that the central bank is willing to take policy actions to different Communication in the past guides the private sector’s expectations of future policies. It not only foreshadowed the path of policy interest rates, but also played a key role in introducing and explaining the use of other unconventional tools such as central bank loans and asset purchase plans. Its effectiveness depends on the effectiveness and credibility of the central bank ’s communication of intentions. There are two ways of forward-looking guidance: one is a comprehensive guidance that clarifies the intent of the tool setting, but does not make a clear comment on the specific operation; the other is a guidance with a clear commitment, which can effectively affect market expectations and reduce Uncertainty, but policy flexibility is low.
During the international financial crisis, the central banks of the United States, the Eurozone, the United Kingdom, Japan, and Canada all adopted forward-looking guidance aimed at supporting expansionary positions. The forward-looking guidance statements were relatively vague in the early days of the international financial crisis, and gradually became more specific. Overall, the interviewed central banks all said that forward-looking guidance can play a positive role in guiding the flattening of the yield curve and reducing uncertainty, but the results are different. Forward-looking guidance can enhance the effectiveness of unconventional monetary policies in certain circumstances , and the central bank can clearly communicate with the market on the use of unconventional instruments. However, Excessive reliance on forward-looking guidance may reduce the private sector ’s motivation to independently predict economic trends, leading the market to rely on central bank guidance for decision-making, resulting in a “herding effect” .
The coordinated use of unconventional monetary policy is essential
The coordinated use of unconventional monetary policy is essential
The order of use of unconventional monetary policy tools is effective for measures Sex is crucial. Comprehensive use of multiple tools, and a reasonable grasp of timing and sequence, can effectively reduce the side effects caused by single use. The results of the study show that asset purchases should only be carried out when there is no room for standard interest rate policies; the mutually reinforcing effect of asset purchases and forward-looking guidance depends on the interaction of the two channels of signaling and portfolio rebalancing; Uncertainty in income limits the traditional intertemporal substitution effect, thereby reducing the effectiveness of forward-looking guidance after a negative demand shock.
Unconventional monetary policy tools should be coordinated with other policies. During the international financial crisis, unconventional monetary policy tools were not the only tools for policymakers to cope with financial and economic austerity. Various economies also issued a series of structural fiscal policies and macro-prudential policies. Although the above measures have similar goals, some of them may have negative interactions, while others may have synergistic effects. In terms of coordination with fiscal policy, if faced with a loss of balance sheet, the central bank needs to obtain clear and unconditional support from the financial department, but it also needs to avoid the risk of losing its independence.
Implications of implementing unconventional monetary policy in the future
Implications of implementing unconventional monetary policy in the future
Unconventional monetary policy tools have achieved positive results in response to the international financial crisis and post-crisis periods: Stabilized various financial conditions (yield rate, term structure, credit scale, etc.), and then stimulated the macro economy. Despite the problems of imbalance and delay, it also avoided the risk of deflation. In the future, the central bank should include unconventional monetary policy tools in the toolbox. In the event of domestic demand shocks, foreign monetary policy spillovers, and financial market failures that affect the effectiveness of monetary policy, the Bank will respond flexibly to the crisis.
Unconventional monetary policy tools need to be activated when the effective interest rate lower bound is reached or monetary policy transmission is blocked
Unconventional monetary policy tools need to be activated when the effective interest rate lower bound is reached or monetary policy transmission is blocked
Two situations require the activation of unconventional monetary policy tools . The first situation is that the policy interest rate is bound by the lower bound of the effective interest rate. As the global population ages, productivity growth slows, and demand for safe assets rises, the long-term equilibrium real interest rate r * tends to decline, and the probability of reaching the lower bound of the effective interest rate rises. The following three situations are more likely to hit the lower bound of the effective interest rate: one is to adopt radical monetary policy under moderate negative demand shocks, the other is that small open economies suffer from international monetary policy spillovers, and the third is a severe negative demand shock. When the above three situations occur, the monetary authority needs to lower the policy interest rate below the lower level of the effective interest rate. Some scholars use the DSGE and FRB / US models to estimate that when the equilibrium interest rate is 2%, the probability of reaching the lower limit of the effective interest rate is 20%; when the equilibrium interest rate is 1%, the probability rises to 40%, meaning that the continuous Interest rates increase the likelihood that monetary policy will be constrained by the lower bound of effective interest rates.
The second scenario is monetary policy to the real economyThe conduction chain is interrupted . Monetary policy transmission is not only affected by long-term and cyclical factors, but also related to market and policy factors. It also depends on factors beyond the control of many central banks, such as the evolution of fiscal policy and financial innovation. Here are three cases: First, the liquidity of the banking system in the money market is tight, second, the deterioration of the financial institutions ’balance sheet triggers a contraction in social credit, and third, the sovereign debt risk of the national balance sheet and the sharp depreciation of the local currency. When the above situation occurs, the central bank can use the unconventional monetary policy tool to directly intervene and dredge the monetary policy transmission blocking point to improve the effectiveness of monetary policy to stimulate the real economy. It should be noted that international financial integration has made monetary policy transmission more and more affected by international spillover effects, increasing the possibility of blocking monetary policy transmission channels.
Strengthen market communication, act decisively, and build the credibility of the central bank to help implement unconventional monetary policy Operational experience is still limited, but the uncertainty of the impact of unconventional monetary policy tools is decreasing, as are concerns about its negative impact. Therefore, the central bank should continue to use unconventional monetary policy tools in the future in order to provide stimulus measures when it touches the lower limit of effective interest rates and to intervene when the transmission of monetary policy is severely hindered. The central bank’s full communication with the market on the implementation intentions and objectives of unconventional monetary policy tools is the key to guiding institutions’ expectations and stabilizing the macro economy. In fact, communication itself is an effective tool . On the one hand, if the message conveyed is clear enough, the central bank does not even need to actually take action; on the other hand, the central bank also needs to retain a certain degree of policy flexibility. Credibility. If private and government departments anticipate that the central bank will always act, it will also cause moral hazard, and it is necessary to give full play to the coordination role of financial supervision and rescue policies. Demonstrating determination to act and taking decisive action can help reduce the side effects of unconventional monetary policy. The central bank must walk in front of the curve, and hesitation may be interpreted by the market as insufficient willingness or limited space for policy responses . Finally, The credibility of the central bank helps the timely and orderly exit of unconventional monetary policy tools. Credibility can come from word-of-mouth, or legal framework and political support of past successful policies.
The use of unconventional monetary policy tools must be tailored and embedded in the monetary policy framework
The second scenario is monetary policy to the real economyThe conduction chain is interrupted . Monetary policy transmission is not only affected by long-term and cyclical factors, but also related to market and policy factors. It also depends on factors beyond the control of many central banks, such as the evolution of fiscal policy and financial innovation. Here are three cases: First, the liquidity of the banking system in the money market is tight, second, the deterioration of the financial institutions ’balance sheet triggers a contraction in social credit, and third, the sovereign debt risk of the national balance sheet and the sharp depreciation of the local currency. When the above situation occurs, the central bank can use the unconventional monetary policy tool to directly intervene and dredge the monetary policy transmission blocking point to improve the effectiveness of monetary policy to stimulate the real economy. It should be noted that international financial integration has made monetary policy transmission more and more affected by international spillover effects, increasing the possibility of blocking monetary policy transmission channels.
Strengthen market communication, act decisively, and build the credibility of the central bank to help implement unconventional monetary policy Operational experience is still limited, but the uncertainty of the impact of unconventional monetary policy tools is decreasing, as are concerns about its negative impact. Therefore, the central bank should continue to use unconventional monetary policy tools in the future in order to provide stimulus measures when it touches the lower limit of effective interest rates and to intervene when the transmission of monetary policy is severely hindered. The central bank’s full communication with the market on the implementation intentions and objectives of unconventional monetary policy tools is the key to guiding institutions’ expectations and stabilizing the macro economy. In fact, communication itself is an effective tool . On the one hand, if the message conveyed is clear enough, the central bank does not even need to actually take action; on the other hand, the central bank also needs to retain a certain degree of policy flexibility. Credibility. If private and government departments anticipate that the central bank will always act, it will also cause moral hazard, and it is necessary to give full play to the coordination role of financial supervision and rescue policies. Demonstrating determination to act and taking decisive action can help reduce the side effects of unconventional monetary policy. The central bank must walk in front of the curve, and hesitation may be interpreted by the market as insufficient willingness or limited space for policy responses . Finally, The credibility of the central bank helps the timely and orderly exit of unconventional monetary policy tools. Credibility can come from word-of-mouth, or legal framework and political support of past successful policies.
The use of unconventional monetary policy tools must be tailored and embedded in the monetary policy framework
The optimal design and implementation strategy of unconventional monetary policy tools largely depend on the source of impact on the economy. Tailoring to the economic structure, legal system, economic shock, and financial system structure helps improve the tool The effectiveness of the system and clarifying the division of responsibilities between the central bank and other government departments. For example, decentralized financial markets may need to intervene in different market segments to restore their transmission effect. The design of policy tools must be more consistent A broad policy framework that is compatible with the central bank ’s collateral management, counterparty arrangements, and fiscal policy framework. As evidence about the effects of unconventional monetary policy instruments continues to accumulate, central banks in various economies will be able to better understand their application and How to best use these tools.
Combined use and effective supervision can control or mitigate the negative effects of unconventional monetary policy tools
Combined use and effective supervision can control or mitigate the negative effects of unconventional monetary policy tools
Combination of different unconventional monetary policy tools It can enhance its influence, and combined with effective supervision can also control or mitigate the negative effects of unconventional monetary policy tools. Although the central banks of various economies use monetary policies, including unconventional monetary policy tools, to quickly and effectively respond to the situation where the transmission channels of monetary policy are blocked, but the symptoms are not permanent, that is, the possibility of this situation cannot be reduced, and prudent Policies can do this. If the unconventional monetary policy tools are carefully designed and combined with appropriate macro and micro prudential policies, the unintended effects of the unconventional monetary policy tools can be eliminated and their use can be more effective. The financial sector should take responsible actions to ensure the sustainability of debt and reduce the possibility of blocking monetary policy transmission channels.
Overall, unconventional monetary policy has proven to be a powerful complement to the traditional monetary policy tools of the central bank. Although unconventional monetary policies provide additional policy choices, they also face limitations, so first of all, we should try to avoid the situation where the central bank needs to use unconventional monetary policy tools. If it needs to be used, it is also necessary to strengthen coordination with fiscal, regulatory, and macro-prudential, timely deal with the financial risks exposed in the implementation of unconventional monetary policies, improve the effectiveness of policies, avoid excessive reliance on unconventional monetary policy tools, and help To achieve the goal of stabilizing currency value and promoting economic growth. ■
[Originally titled “Transnational Analysis of Unconventional Monetary Policy Tools”. This article is excerpted from the working paper “Unconventional monetary policy tools: Transnational Analysis” published by the Bank for International Settlements (BIS):a cross-country analysis), the Working Group on Unconventional Monetary Policy Tools: Cross-Country Analysis is chaired by Simon M Potter, Executive Vice President of the Federal Reserve Bank and Frank Smets, Director of the Economic Analysis Department of the European Central Bank. ]