Large Purchases Research Articles

Monetary Policy 101: A Primer on the Fed’s Changing Approach to Policy Implementation

The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve's large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed's implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC's target will not work in current circumst ances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation

The Federal Reserve conducts monetary policy in order to achieve its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates as prescribed by the Congress and laid out in the Federal Reserve Act. For many years prior to the financial crisis, the FOMC set a target for the federal funds rate and achieved that target through small purchases and sales of securities in the open market. In the aftermath of the financial crisis, with a superabundant level of reserve balances in the banking system having been created as a result of the Federal Reserve’s large scale asset purchase programs, this approach to implementing monetary policy will no longer work. This paper provides a primer on the Fed’s implementation of monetary policy. We use the standard textbook model to illustrate why the approach used by the Federal Reserve before the financial crisis to keep the federal funds rate near the FOMC’s target will not work in current circumstances, and explain the approach that the Committee intends to use instead when it decides to begin raising short-term interest rates.

Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter?

In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB’s purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB’s SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.

The Impact of a Central Bank's Bond Market Intervention on Foreign Exchange Rates

This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.

Time to ban lead in industrial paints and coatings.

In the U.S. and most high-income countries, regulations already restrict the use of lead paint for residential applications. However, few countries have enacted comprehensive bans on the use of lead additives in all paints. In 2009, more than 120 countries at the UN International Conference on Chemicals Management (ICCM) voted to phase-out all lead paints (1). Since then, a few countries including the Philippines and Nepal have enacted regulations to eliminate the use of lead additives in both consumer and “industrial” paints, but most countries have no restrictions on the manufacture or use of lead in any type of paint (2). The hazards of lead paint have been known since at least the 1800s and even the recommended alternatives to lead pigments advocated in that era are still used in making paints today (3). Yet, the debate on banning lead paint still rages in capitols from Dhaka to Brussels despite overwhelming evidence that workers and children are harmed from lead exposures resulting from these applications. In the European Union (EU), a fight is currently under way over a petition to exempt Lead Chromate pigments from the registration, evaluation, authorization, and restriction of chemicals (REACH) regulations. It is an unusual battle that has pitted the world’s largest lead pigment manufacturer, the Canadian-based Dominion Colour Corporation, against some European industry associations and AkzoNobel, the world’s largest paint manufacturer, which eliminated the use of lead in all their products in 2011 (4, 5). Although in many countries, architectural/decorative paints still contain significant concentrations of lead, “industrial” paints generally have lead concentrations that are up to 10 times greater. For example, road marking paints can contain up to 20,000 ppm lead (6). However, there are well known substitutes for lead additives in all types of paints and coatings used for all applications. Despite the availability of substitutes, multi-national paint companies often sell lead-free coatings in some markets while they continue to market lead-containing products in jurisdictions where there are no regulatory constraints and customers are less aware of the hazards. In the U.S., efforts to regulate the lead content of paints initially focused on decorative/architectural paints and consumer products. Subsequently, large paint purchasers in the U.S. had begun to assess the costs of safely maintaining and eventual demolishing industrial structures, bridges, ships, and roadways with lead paint and elected to require lead-free paint and coatings in project and product specifications.

Have Large Scale Asset Purchases Increased Bank Profits?

This paper empirically examines the effects of the Federal Reserve's Large Scale Asset Purchases (LSAP) on bank profits. We use a new dataset on individual LSAP transactions and bank holding company data from the Fed's FRY-9C regulatory reports to construct a large panel of banks for 2008Q1 to 2009Q4. Our results suggest that banks that sold Mortgage-backed Securities to the Fed (“treatment banks”) experienced economically and statistically significant increases in profitability after controlling for common determinants of bank performance. Banks heavily “exposed” to MBS purchases should also experience increases in profitability through asset appreciation. Our results also provide evidence for this type of spillover effect and suggest that large banks may have been more affected. Although our results suggest that MBS purchases increased bank profits, we find only mixed evidence that these were associated with increased lending. Our findings are thus consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.

Reducing the price of treatment for multidrug-resistant tuberculosis through the Global Drug Facility.

ProblemMany countries have limited experience of securing the best prices for drugs and have little negotiating power. This is particularly true for the complex, lengthy and expensive regimens used to treat multidrug-resistant tuberculosis.ApproachThe Stop TB Partnership’s Global Drug Facility is dedicated to improving worldwide access to antituberculosis medicines and diagnostic techniques that meet international quality standards.Local settingThe Global Drug Facility is able to secure price reductions through competitive tendering among prequalified drug manufacturers and by consolidating orders to achieve large purchase volumes. Consolidating the market in this way increases the incentives for suppliers of quality-assured medicines.Relevant changesIn 2013 the Global Drug Facility reduced the price of the second-line drugs it supplies for multidrug-resistant tuberculosis: the overall cost of the longest and most expensive treatment regimen for a patient decreased by 26% – from 7890 United States dollars (US$) in 2011 to US$ 5822 in 2013.Lessons learntThe price of treatment for multidrug-resistant tuberculosis supplied by the Global Drug Facility was reduced by consolidating orders to achieve large purchase volumes, by international, competitive bidding and by the existence of donor-funded medicine stockpiles. The rise in the number of suppliers of internationally quality-assured drugs was also important. The savings achieved from lower drug costs could be used to increase the number of patients on high-quality treatment.

Scale and Public Health: Missouri's Cigarette Tax Rate

Proposition B, which would have raised the tobacco tax in Missouri from 17 cents per pack to 90 cents, narrowly failed in the 2012 general election, leaving Missouri with the lowest tobacco tax in the United States. Despite scientific and economic evidence demonstrating the health and economic benefits of higher tobacco taxes, Missouri remains reluctant to cave into pressure levied by various organizations to raise the rate. There are eight other cigarette tax jurisdictions along Missouri's borders, and three of the states have per-pack taxes of over 1 dollar. This presents an economic opportunity, as Missouri border towns have become a destination for large cigarette purchases. Based on the competitive advantage Missouri cigarette vendors have over similar vendors in adjacent states, we intend to explore the results of the Proposition B vote to examine whether certain border areas were most strongly against the Proposition because it might hurt their local economy.

A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions

Deteriorating economic conditions in late 2008 led the Federal Reserve to lower the target federal funds rate to near zero, inject liquidity into the financial system through novel facilities, and engage in large scale asset purchases. The combination of conventional and unconventional policy measures prevents using the effective federal funds rate to assess the effects of monetary policy in samples that extend beyond 2008. This paper develops an approach to identify the effects of monetary policy shocks in such instances. We employ a newly created broad monetary aggregate to elicit the effects of monetary policy shocks both prior to and after 2008. Our model is bolstered by its ability to produce plausible responses to monetary policy shocks free from price, output, and liquidity puzzles that have plagued other approaches.

Understanding the Impact of Large Scale Asset Purchases on Long-Term Government Bond Yields: The Quantitative Easing Paradox

Empirical event studies estimate that Large Scale Asset Purchases (LSAP) push down long-term interest rates through the portfolio balance channel. However, since portfolio reallocation takes time to materialise, a longer horizon may be more appropriate to assess the effects of LSAP. With a longer horizon in mind, a deep look at historical experiences leads to the quantitative easing paradox: LSAP raise long-term government bond yields, while a premature exit lowers long-term government bond yields. To solve this puzzle, this paper argues that LSAP mainly raise the government term premium. In the wake of a severe economic and financial crisis, the period of heightened risk aversion and the safe asset shortage weigh on the government term premium. Through the portfolio balance channel, LSAP increase the supply of safe assets and decrease the demand of money at the same time, thereby lifting the government term premium. Finally, a new econometric method introduced by Brodersen et al. (2014), which infers the causal impact of LSAP on the term premium, confirms that LSAP have a significant positive effect on long-term government bond yields.

Independence and individualism: conflated values in farmer cooperation?

Social scientists have long examined the changing role of the individual, and the influence of individualism in social and economic arrangements as well as behavioral decisions. With respect to co-operative behavior among farmers, however, the ideology of individualism has been little theorized in terms of its relationship to the longstanding virtue of independence. This paper explores this relationship by combining analysis of historical literature on the agricultural cooperative movement with the accounts of contemporary English farmers. I show that the virtue of independence is deployed to justify a variety of cooperative (formal and informal) and non-cooperative practices and that, despite apparently alternative interpretations, independence is most often conflated with individualistic premises. That conflation, I argue, leads farmers to see their neighbors as natural competitors: as those from whom which independence must be sought. This has the effect of masking the structural dependencies which farmers face (such as lenders and large purchasers) and limits the alternatives available to them to realize a view of independence that is maintained, rather than opposed, by interdependent collective action. Thus perceived, individualism is an ideological doctrine that succeeds by appealing to the virtue of independence, while simultaneously denying its actual realization.

Hospital Safety Scores

Hospital Safety Scores

The 'Amazon Tax': Empirical Evidence from Amazon and Main Street Retailers

For years, online retailers have maintained a price advantage over brick-and-mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that the online retailer Amazon collect sales tax during checkout. Using transaction-level data, we document that households living in these states reduce Amazon purchases by 9.4% after sales tax laws were implemented, implying elasticities ranging from –1.2 to –1.4. The effect is more pronounced for large purchases, for which we estimate a reduction of 29.1% in purchases, corresponding to an elasticity of –3.9. Studying competitors in the electronics field, we detect some evidence of substitution toward competing retailers. Consistent with an income effect, we find a reduction in spending in other categories that is concentrated among the heaviest Amazon shoppers.

QE and Unemployment: A Financial Friction DSGE Model with LSAPs and Labor Market Search

In response to the disruption of credit markets and the zero lower bound during the recent financial crisis, the Federal Reserve introduced a variety of new policy tools. Perhaps, the most visible of these tools is large scale asset purchases (LSAP) programs, often referred to as "quantitative easing" (QE). Among the policy objectives, unemployment rate is a crucial target to the central bank. However, exactly which factors could account for the impact of QE programs on unemployment has yet to be resolved. Also, agreement on the effectiveness of QE has stimulated the economic recovery is far from universal. This paper is to have a financial friction DSGE model with labor market search to assess the impact of regime switching between conventional and unconventional monetary policy on aggregate economic activity, especially on labor market, and to evaluate the effect of QE policy on the unemployment rate during the recent recession. The paper reveals channels through which the credit policy shocks transmit to labor market and the impacts of financial shock is amplified. The paper finds that bond purchasing policy has stronger effect on labor market and the security purchase policy creates more volatility to the unemployment rate. Both policies have effective short-run effect yet ineffective even negative long-run effect. Also, timing effects of asset purchase policy reactions are different.

Improving Trade in Large Ruminants and Products by Transboundary Animal Disease Control in Lao PDR

Within the Greater Mekong Subregion (GMS) the nation of Lao PDR has a small population of ~6.3 million people and a relatively large population of large ruminants (cattle and buffalo) at ~2.7 million head. With the growing demand for red meat in South-East Asia driven by a rising middle class and the associated changes in dietary intake, Lao smallholder farmers have the opportunity to satisfy this demand provided key constraints are addressed. Recent research has highlighted a series of best practice interventions directed at the smallholder level to improve animal health and production. Animal movement and trade have been identified as a major risk factor involved in transboundary animal disease (TAD) transmission including foot and mouth disease. Hence, understanding the supply chain is important for effective TAD control. The results of a survey of 32 large ruminant traders in northern Laos in 2011 were matched to a longitudinal production survey from 6 villages in northern Laos to develop a value chain analysis. The 32 traders provided details on 8,796 large ruminant trades, operating locations, large ruminant purchase prices, transport methods, major costs, livestock destinations and trader views on major constraints to development of the large ruminant market. The 2011 farm gate value of the national large ruminant herd was estimated as USD 835.8 million based on trader purchase price and village herd production data. As improvement of large ruminant production has been linked to reducing regional rural poverty and food insecurity in smallholder communities through opportunities for business development and rural employment, addressing both TADs and the underdeveloped market in the GMS is important. Whilst control of TADs will need to remain a medium term priority, further research is needed to ensure that market development remains aligned with disease control efforts.

Understanding Quantitative Easing

Many misunderstandings are still circulating about the actual operational aspects and impacts of Quantitative Easing, also known as Permanent Open Market Operations or Large Scale Asset Purchases. This brief primer will provide a series of basic understandings that give the reader better insights as to the actual impacts of the program and how it works with the hope of clarifying some of the misconceptions.

How Persistent are Monetary Policy Effects at the Zero Lower Bound?

Event studies show that Fed unconventional announcements of forward guidance and large scale asset purchases had large and desired effects on asset prices but do not tell us how long such effects last. Wright (2012) used a structural vector autoregression (SVAR) to argue that unconventional policies have very transient effects on asset prices, with half-lives of 3 months. This would suggest that unconventional policies can have only marginal effects on macroeconomic variables. The present paper shows, however, that the SVAR is unstable, forecasts very poorly and therefore delivers spurious inference about the duration of the unconventional monetary shocks. In addition, implied in-sample return predictability from the SVAR greatly exceeds that which is consistent with rational asset pricing and reasonable risk aversion. Restricted models that respect plausible predictability in asset returns are more stable and imply that the unconventional monetary policy shocks were fairly persistent but that our uncertainty about their effects increases with forecast horizon. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.

International channels of the Fed's unconventional monetary policy

Previous research has established that the Federal Reserve's large scale asset purchases (LSAPs) significantly influenced international bond yields. We use dynamic term structure models to uncover to what extent signaling and portfolio balance channels caused these declines. For the U.S. and Canada, the evidence supports the view that LSAPs had substantial signaling effects. For Australian and German yields, signaling effects were present but likely more moderate, and portfolio balance effects appear to have played a relatively larger role than in the U.S. and Canada. Portfolio balance effects were small for Japanese yields and signaling effects basically nonexistent. These findings about LSAP channels are consistent with predictions based on interest rate dynamics during normal times: Signaling effects tend to be large for countries with strong yield responses to conventional U.S. monetary policy surprises, and portfolio balance effects are consistent with the degree of substitutability across international bonds, as measured by the covariance between foreign and U.S. bond returns.

Impact on alcohol purchasing of a ban on multi‐buy promotions: a quasi‐experimental evaluation comparing Scotland with England and Wales

AimsTo evaluate the impact of the 2011 Scottish ban on multi-buy promotions of alcohol in retail stores.Design and settingDifference-in-differences analysis was used to estimate the impact of the ban on the volume of alcohol purchased by Scottish households, compared with those in England and Wales, between January 2010 and June 2012.ParticipantsA total of 22 356 households in Scotland, England and Wales.MeasurementsRecords of alcohol purchasing from each of four categories (beer and cider, wine, spirits and flavoured alcoholic beverages), as well as total volume of pure alcohol purchased.FindingsControlling for general time trends and household heterogeneity, there was no significant effect of the multi-buy ban in Scotland on volume of alcohol purchased either for the whole population or for individual socio-economic groups. There was also no significant effect on those who were large pre-ban purchasers of alcohol. Most multi-buys were for beer and cider or for wine. The frequency of shopping trips involving beer and cider purchases increased by 9.2% following the ban (P < 0.01), while the number of products purchased on each trip decreased by 8.1% (P < 0.01). For wine, however, these effects were not significant.ConclusionsBanning multi-buy promotions for alcohol in Scotland did not reduce alcohol purchasing in the short term. Wider regulation of price promotion and price may be needed to achieve this.

Evaluating quantitative easing: a DSGE approach

This paper develops a simple Dynamic Stochastic General Equilibrium (DSGE) model capable of evaluating the effect of large purchases of treasuries by central banks. The model exhibits imperfect asset substitutability between government bonds of different maturities and a feedback from the term structure to the macroeconomy. Both are generated through the introduction of portfolio adjustment frictions. As a result, the model is able to isolate the portfolio rebalancing channel of Quantitative Easing (QE). This theoretical framework is employed to evaluate the impact on yields and the macroeconomy of large purchases of medium- and long-term treasuries recently carried out in the US and UK. The results from the calibrated model suggest that large asset purchases of government assets had stimulating effects in terms of lower long-term yields, and higher output and inflation. The size of the effects is nevertheless sensitive to the speed of the exit strategy chosen by monetary authorities.