Large-scale Asset Purchases Research Articles

Spillovers of US Unconventional Monetary Policy to Emerging and Advanced Countries

This study investigates the international spillover effects of US unconventional monetary policy — frequently called large-scale asset purchases or quantitative easing (QE) — on advanced and emerging market economies, using VAR models with high-frequency daily data. Blinder (2010) argues that the QE measures primarily aim to reduce US interest rate spreads such as term premiums and risk premiums. Considering this argument, we use two interest rate spreads as indicators of the QE policy: the mortgage spread and term spread. Empirical findings, based on data from 20 emerging and 20 advanced countries, reveal that US unconventional monetary policies significantly affect financial conditions in both emerging and advanced countries by altering the risk-taking behavior of investors, which suggests that the risk-taking channel plays an important role in transmitting the effects of these policies to the rest of the world. The extent of these effects depends on the type of QE measures. QE measures such as purchases of private-sector securities that lower the US mortgage spread exert stronger and more significant spillover effects on international financial markets than do measures that reduce the US term spread. Furthermore, the estimated financial spillovers vary substantially across countries, as well as between and within the two country groups, emerging markets and advanced countries.

A model of the federal funds market: Yesterday, today, and tomorrow

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves, and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.

International Spillovers of Large-Scale Asset Purchases

AbstractThis paper evaluates the international spillover effects of large-scale asset purchases (LSAPs) using an estimated two-country dynamic stochastic general-equilibrium model with nominal and real rigidities and portfolio balance effects. Portfolio balance effects arise from imperfect substitutability between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs in the United States lower long-term yields and stimulate economic activity not only in the United States, but also in the rest of the world (ROW) economy. This occurs despite the currency appreciation in the ROW and the resulting deterioration in their trade balance. The key for this result is the decline in the ROW term premia through the portfolio balance channel, as the relative demand for ROW long-term bonds increases following an LSAP in the United States. Our model indicates that US asset purchases that generate the same output effect as US conventional monetary policy has larger international spillovers due to stronger portfolio balance effects. We also show that international openness in financial markets reduces the stimulatory effects of LSAPs in the originating country, while increasing their international spillover effects.

The Non-Standard Monetary Policy Measures of the ECB: Motivations, Effectiveness and Risks

This paper examines the challenges faced by the European Central Bank since the outbreak of the global financial crisis. From 2008 to 2014, the need to preserve the correct functioning of the monetary policy transmission mechanism and ensure the supply of credit to the private sector stretched the limits of conventional monetary policy. In 2015, the risk of deflation led the ECB to start a large scale asset purchase programme. The analysis is largely based on a review of the many studies that Banca d’Italia staff has produced on the factors that have brought inflation to unprecedented low levels in 2014 and on the effects of the asset purchase programme.

Can the U.S. Interbank Market be Revived?

Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to pre-crisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trading may initially increase as excess reserves continue to decline, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by non-bank lending to banks when excess reserves become scarce. This non-monotonic response of interbank trading volume to reductions in excess reserves may lead to misleading forecasts about future fed funds prices and quantities when/if the Fed begins to normalize their balance sheet by reducing excess reserves.

The Non-Standard Monetary Policy Measures of the ECB: Motivations, Effectiveness and Risks

Abstract This paper examines the challenges faced by the European Central Bank since the outbreak of the global financial crisis. From 2008 to 2014, the need to preserve the correct functioning of the monetary policy transmission mechanism and ensure the supply of credit to the private sector stretched the limits of conventional monetary policy. In 2015, the risk of deflation led the ECB to start a large scale asset purchase programme. The analysis is largely based on a review of the many studies that Banca d’Italia staff has produced on the factors that have brought inflation to unprecedented low levels in 2014 and on the effects of the asset purchase programme. Zusammenfassung Dieser Beitrag untersucht die Herausforderungen, vor denen die Europäische Zentralbank seit dem Ausbruch der globalen Finanzkrise steht. Von 2008 bis 2014 hat die Notwendigkeit, das ordnungsgemäße Funktionieren des geldpolitischen Transmissionsmechanismus zu wahren und die Kreditversorgung des privaten Sektors sicherzustellen, die Grenzen der konventionellen Geldpolitik überschritten. Im Jahr 2015 führte das Deflationsrisiko dazu, dass die EZB ein groß angelegtes Anleihenkaufprogramm aufnahm. Die vorliegende Analyse basiert im Wesentlichen auf einer Überprüfung der zahlreichen Studien, welche die Mitarbeiter der Banca d‘Italia zu den Faktoren erstellt haben. Diese Faktoren haben einerseits die Inflation 2014 auf ein beispiellos niedriges Niveau gebracht und andererseits Auswirkungen auf das Programm zum Ankauf von Vermögenswerten zur Folge gehabt. JEL Classification: E31, E43, E52

A multiplex financial network approach to policy evaluation: the case of euro area Quantitative Easing

Over the last decades, both advanced and emerging economies have experienced astriking increase in the intra-financial activity across different asset classes and increasingly complex contract types, leading to a far more complex financial system. Until the 2007-2008 crisis, the increased financial intensity and complexity was believed beneficial in making the financial system more resilient and less vulnerable to shocks. However, in 2007-2008, the advanced economies suffered the biggest financial crisis since the 1930s, followed by a severe post-crisis recession, questioning the adequacy of traditional tools in predicting, explaining, and responding to periods of financial distress. In particular, the effect of complex interconnections among financial actors on financial stability has been widely acknowledged. A recent debate focused on the effects of unconventional policies aimed at achieving both price and financial stability. Among these unconventional policies, Quantitative Easing (QE, i.e., the large-scale asset purchase programme conducted by a central bank upon the creation of new money) has been recently implemented by the European Central Bank (ECB). In this context, two questions deserve more attention in the literature. First, to what extent, the resources provided to the banking system through QE are transmitted to the real economy. Second, to what extent, the QE may also alter the pattern of intra-financial exposures and what are the implications in terms of financial stability. Here, we address these two questions by developing a methodology to map the multilayer macro-network of financial exposures among institutional sectors across financial instruments (i.e., loans and deposits, debt securities, and equity), and we illustrate our approach on recently available data. We then test the effect of the implementation of ECB’s QE on the time evolution of the financial linkages in the multilayer macro-network of the euro area, as well as the effect on macroeconomic variables, such as consumption, investment, unemployment, growth, and inflation.

The Growing Impact of US Monetary Policy on Emerging Financial Markets: Evidence from India

Much research has been devoted to studying the international spillover effects of US monetary policy. However, a lot of the focus has been on the recent unconventional monetary policies undertaken by the Federal Reserve. Combining high frequency financial market data with a time-varying parameter approach we show that US monetary policy decisions have had significant effects on the Indian stock markets well before the use of unconventional policy tools and that these effects have gotten stronger over time. In addition to the conventional channel of surprise changes in the policy rate, we find that US monetary shocks are also transmitted through an uncertainty channel, which is especially important for announcements about large scale asset purchases (quantitative easing). Using firm level stock prices, we also show that the higher sensitivity of the aggregate response is uniform across the stock market and is not driven by the increased exposure of any specific industry to US monetary policy. Instead, our results suggest that it is driven by the portfolio decisions of foreign institutional investors and the exchange rate becoming more sensitive to US monetary policy.

Unconventional U.S. Monetary Policy: New Tools, Same Channels?

In this paper, we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit/bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large-scale asset purchase programs.

The Effect of Monetary Policy Shocks on Mutual Fund Investing

We study the effects of unexpected changes in the stance of monetary policy on mutual fund performance and allocation decisions over the recent period of unconventional U.S. monetary policy. Taking an agnostic approach on the transmission mechanism of monetary policy on mutual fund investing, we find that monetary policy shocks have a direct effect on fund performance and flow dynamics, and that the effect of these surprises differs by investment strategy. The results show that an unexpected tightening of the stance of policy is associated with negative performance and outflows from bond funds, in particular those investing in government, investment grade, and international bonds. Results also point to a negative relationship between equity fund performance and policy tightening. Moreover, Federal Reserve’s balance sheet policy (i.e. large-scale asset purchases) have a strong positive effect on equity fund returns, especially on those investing in emerging markets.

Did QE lead banks to relax their lending standards? Evidence from the Federal Reserve’s LSAPs

Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.

Changing Macroeconomic Dynamics at the Zero Lower Bound

ABSTRACTThis article develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identifies shocks to demand, supply, monetary policy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shocks. During the crisis period, spread shocks became more important for movements in unemployment and inflation. A counterfactual exercise evaluates the importance of lower bond-yield spread during the crises and suggests that the Fed’s large-scale asset purchases helped lower the unemployment rate by about 0.6 percentage points, while boosting inflation by about 1 percentage point.

The macroeconomic effects of asset purchases revisited

This paper revisits the macroeconomic effects of the large-scale asset purchase programmes launched by the Federal Reserve and the Bank of England from 2008. Using a Bayesian VAR, we investigate the macroeconomic impact of shocks to asset purchase announcements and assess changes in their effectiveness based on sub-sample analysis. The results suggest that the early asset purchase programmes had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero. The reduced effectiveness seems to reflect in part better anticipation of asset purchase programmes over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve's last asset purchase programme. Finally, in all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices.

Unconventional Policy Tools and its Challenges

The Great Financial Crisis of 2008 not only marks the period of great period accommodation among central bank to support liquidity in the financial system; but also marks the period where Fed, BOJ, ECB and BOE perform a courageous act of policy experimentation. The paper surveyed the different literature on the motivation of cental bank for the used of unconventional policy. Literature survey shows that unconventional tools improved credit condition in the economy and financial inter-mediation of banks. During the Fed’s QE it buys US Treasury bonds which consider as a global safe asset. Large-scale asset purchase of the Fed decreases the supply of safe assets that will create financial instability if not communicated and implemented properly. We see that meaningful recovery is not possible if the financial market is under stress and credit is not intermediated to firms and household. One notable result is that QE works best not on credit channel but mainly on asset price specifically on term premium. Other thing is that the use of unconventoinal tool is proven to face great legal and communication challenges.

The Effect of the Fed's Large‐Scale Asset Purchases on Inflationary Expectations

In 2008 U.S. demand collapsed and triggered deflation. The Fed employed large‐scale asset purchases (LSAP) to fight deflation. How did news of LSAP affect inflationary expectations? If investors believed that LSAP would raise inflation, they would sell assets exposed to inflation and purchase inflation hedges. This would lower the prices of assets that are harmed by inflation and raise the prices of assets that benefit from inflation. Examining the relationship between asset price changes and inflation sensitivities can thus shed light on how financial markets process LSAP news. Results across 60 assets indicate that initially LSAP announcements lowered expected inflation. Only as inflation approached its target did news of LSAP raise expected inflation.

New Normall or New Orthodoxyy? Elements of a Central Banking Framework for the After-Crisis

Two different approaches to central banking in the aftermath of the crisis are contrasted. In the first one, labelled ‘New Normal’, the monetary policy strategy is broadened to encompass such objectives as financial stability or full employment. Furthermore, the inflation target is raised and large scale asset purchases (LSAPs) are retained as a standard instrument for implementing monetary policy. In the second approach, which we label ‘New Orthodoxy’, central banks keep the same objectives but interest rates can be brought to unprecedented negative levels, thus making LSAPs possibly unnecessary. The role of central banks in preserving financial stability is also explicitly recognized, both by themselves and by society, making their contribution to this task more effective and transparent.

Monetary-fiscal policy interactions under asset purchase programs: Some comparative evidence

Using a policy-oriented multivariate VECM approach and monthly data over the period of unconventional monetary policy, this paper presents the first evidence of both long-run and short-run dynamic interactions between unconventional monetary policy and fiscal policy under central banks' large-scale asset purchase programs for the United States and Japan. Empirical results show clear differences in monetary-fiscal policy interactions between the two countries. First, our findings suggest that fiscal policy acts as the leading indicator in the monetary-fiscal policy combination in the U. S., while monetary policy acts as the leading indicator in the monetary-fiscal policy combination in Japan. Second, the impact of the BOJ's government bond purchases on monetary stock is much smaller than that of the Fed's Treasury securities purchases, suggesting differences in the transmission mechanism of unconventional monetary policy in the two countries. Lastly, compared to the U. S., the monetary-fiscal policy combination in Japan has been found to have less impact on macroeconomic variables during the period of unconventional monetary policy. This evidence suggests that monetary policy and fiscal policy reinforce each other more in their effects on the macroeconomy in the U. S.

US interest rate spread and energy consumption by sector (Evidence of pre and post implementation of the Fed’s LSAPs policy)

This paper represents the first empirical study to investigate the effects of interest rate spread shocks before and after the implementation of LSAPs (Federal Reserve large-scale asset purchases) on energy consumption for different sectors. The US monthly data (2002–2015) for interest rate spreads, such as term, corporate, and mortgage rate spreads, and paper bills, and the energy used by sector (residential, commercial, industrial, transportation, and electric power) were used in this study. Our analysis provided evidence that a cut in interest rate spreads was seen as a positive signal in the energy market. This paper demonstrated that the mortgage spread (MORS) shock had a significant effect on the energy consumed by the residential sector, after the implementation of unconventional monetary policies. Likewise, paper bill shocks had a significant effect on energy consumption for different sectors before the implementation of unconventional monetary policies. The results indicated that the Federal Fund Effective rate had a weak impact on components of energy consumption before the implementation of quantitative easing policies by the Federal Reserve.

The asymmetric effects of U.S. large-scale asset purchases on the volatility of the Canadian dollar futures market

This paper investigates the asymmetric effects of U.S. large-scale asset purchases on the volatility of the Canadian dollar futures market. This approach is innovative in so far as it examines the effects of allowing two-round impacts to differ in our settings of dynamic volatility with time-varying jump intensity because the world economic situation differs during periods of large-scale asset purchases. Utilizing the daily futures price of the exchange rate for the Canadian dollar against the U.S. dollar, the empirical findings show that U.S. large-scale asset purchases have significant asymmetric effects on the volatility of the Canadian dollar futures market. Two kinds of asymmetry are observed. Firstly, the impact of large-scale asset purchases is smaller in the first round of the large-scale asset purchases than in the second round. Secondly, an expansionary policy causes higher volatility in the Canadian dollar futures market than does a contractionary policy due to a signal of high liquidity.

Portfolio balance effects and the Federal Reserve’s large-scale asset purchases

PurposeWhereas much of previous literature focuses upon the impact on yields from the Federal Reserve’s large-scale asset purchases (LSAPs), the purpose of this paper is to study the changes to expected returns.Design/methodology/approachThis empirical investigation offers support for changes to risk premia coincident with LSAPs.FindingsFor both equity and bonds, the authors find evidence for supply/demand LSAPs effects; the equity effects are consistent with a substitution effect from bonds to equities, whereas the bond effects appear to be an anomaly.Originality/valueThe findings represent new insight for weighing the efficacy and identifying the scope of LSAPs.