Unconventional Monetary Policy Measures Research Articles

Unconventional Monetary Measures During the COVID-19 Pandemic: A Case Study for Central and Eastern European Countries

Abstract The COVID-19 pandemic had major negative repercussions on the countries from Central and Eastern Europe (CEE), which experienced almost similar declines in the economy in 2020. Against this background, central banks from CEE initiated unconventional monetary policy measures aimed at mitigating the economic and social effects of the pandemic. The purpose of this article is to analyse the CEE central banks’ response to the pandemic crisis, i.e., the response of the Czech Republic, Hungary, Poland, and Romania, and to unveil the particularities of the unconventional monetary policy adopted by these states. To achieve this goal, the article presents a chronology of the main decisions adopted by CEE central banks during the pandemic and the dynamics of these central banks’ assets. The main findings suggest that CEE monetary authorities, like major central banks, initiated the first measures to counter the negative effects of the pandemic on the economy in March 2020. All of them cut the key interest rate and injected liquidity through open market operations in order to support lending to the real economy. However, the magnitude of these measures was different depending on the economic and financial systems’ peculiarities. Moreover, not all of them initiated purchases of assets or new lending facilities.

The effects of the ECB’s unconventional monetary policies from 2011 to 2018 on banking assets

We examine the effects of all three major European Central Bank (ECB) unconventional monetary policies since 2011 for euro area banks’ holdings of loans, government securities and cash deposited in central banks. The three ECB’s policies are long-term refinancing operations (LTROs), asset purchase programs and the ECB’s interest rate at its deposit facility. We also compare the responses of non-crisis and crisis countries to these policies. Our evidence indicates that the ECB’s unconventional monetary policy measures increased bank loans across the euro area countries. The second round of LTROs, also known as targeted LTROs (TLTROs), conditioned additional lending on banks. This change had substantially larger effect on total lending by banks. The computed effects of the average sizes of LTROs and TLTROs indicate that in non-crisis countries, LTROs increased bank loans by 7.6 % of assets and TLTROs increased bank loans by 16.4 % of assets; the increases were 8.4 % and 14.6 % for LTROs and TLTROs, respectively, in crisis countries. We find that both LTROs and TLTROs were associated with decreases in government securities held by banks in non-crisis countries while the LTROs was associated with increases in government securities held by banks in crisis countries.

Unconventional monetary policy measures and money markets: Estimating the impact of targeted repo operations on asset prices

We analyse the impact of unconventional monetary policy measures undertaken by central banks in response to COVID-19 crisis on asset prices in money markets. Using novel primary issue-level data of commercial papers (CPs) in India and a staggered difference-in-differences estimation strategy, we examine the effects of On-Tap Targeted Long-Term Repo Operations (On Tap TLTRO) on CP yields of issuers belonging to the targeted sectors. We find that the repo operations lead to a significant reduction of around 30 basis points in the borrowing costs of targeted sectors’ issuers. The findings highlight the effectiveness of interest rate and bank lending channels of transmission of unconventional monetary policy.

Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets

We examine the dynamic interconnections between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with daily CDS data from IHS Markit and high-frequency data from MTS between 2008 and 2018 using the extended TVP-VAR connectedness approach of Antonakakis et al. (2020). We find that, for most of the period, net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and discover that most of the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator using a Probit model. Our results suggest that a decline in global funding liquidity, monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while tensions in financial markets and the deterioration of fiscal sustainability are factors that reduce such a probability.

An Assessment of Unconventional Monetary Policy During COVID-19 Pandemic in India

We employ event study methodology to analyze the impact of unprecedented unconventional monetary policy (UMP) measures employed by the Reserve Bank of India to fortify monetary transmission mechanism and to restore financial stability. We find that the UMP announcements result in a decline in bond yields and yield spread as well as increase in market capitalization and sectoral portfolio of stock returns. Evaluating the relative efficacy of UMP measures, we find that targeted long-term repo operation announcements are more effective in easing bond yields than mere long-term repo operations. Our findings provide beneficial inference for day-traders and investors as asset prices increase significantly and durable goods producing stock returns found to be higher than those of non-durable goods. The lessons that can be drawn for the emerging market economy central banks, who do not have enough space to conduct conventional monetary policy and even when they do not face zero lower bound interest rate, they still can employ UMP tools to directly influence banks cost of funds, and long-term bond yields and interest rates, and in turn, portfolio of stock returns and investments to stimulate aggregate demand. JEL Codes: C13, C54, E52, E65

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.

Monetary policy spillovers: the impact of ECB conventional and unconventional monetary policies on the Swiss stock market

ABSTRACT We examine the impact of conventional and unconventional ECB monetary policies on the Swiss stock market. Our results show that Swiss stock returns respond significantly to conventional and unconventional monetary policy measures, with conventional monetary policy having an impact only before the financial crisis. The response to unconventional policy shocks is less strong after the introduction of a minimum exchange rate regime by the Swiss National Bank (SNB). Our results are robust to simultaneity and endogeneity problems.

The credit channel of monetary policy before and after the zero lower bound: Evidence from the US equity market

AbstractI evaluate the effectiveness of conventional and unconventional monetary policy measures by examining the transmission mechanism through the credit channel before and after the zero lower bound (ZLB). I focus on the impact of conventional and unconventional policy shocks on a cross‐section of portfolio returns sorted on characteristics that capture firms' financial constraints (size and book‐to‐market). Results show that the credit channel of monetary policy is even more relevant at the ZLB relative to the previous period, and its effectiveness is almost entirely attributed to the high sensitivity of financially constrained firms (small and value stocks) to unconventional surprises. I find strong evidence that the reaction of portfolio returns to policy shocks is asymmetric depending on the state of the economy (recession vs. expansion), type of policy surprise (positive vs. negative), and aggregate level of market volatility. My findings are robust to several model extensions and alternative specifications.

Complexity of ECB communication and financial market trading

We empirically examine how the complexity of ECB communications affects financial market trading based on high-frequency data from European stock index futures trading between 2009 and 2017. Analysing the linguistic complexity of the ECB’s introductory statements and differentiating between press conferences with and without announcements of unconventional monetary policy measures (UMPM), we find that more complex communication, i.e. high linguistic complexity and UMPM-announcement, is associated with a lower level of contemporaneous trading activity. Moreover, complex communication leads to a temporal shift in trading activity towards the subsequent Q&A session, which suggests that Q&A sessions facilitate market participants’ information processing.

The ECB’s Unconventional Monetary Policy Measures During the Coronavirus Crisis

The objective of the paper is to analyze the key measures of unconventional monetary policy implemented by the European Central Bank (ECB) in response to the coronavirus crisis. The paper focuses on the introduction of the Pandemic emergency purchase programme (PEPP), but also on the adoption of more favorable conditions for refinancing operations and the introduction of additional Targeted longer-term refinancing operations (TLTROs). The ECB’s key interest rates are maintained at their present or lower levels, depending on the inflation outlook in the euro area. The research methodology in the paper includes theoretical and methodological analysis, comparative study, descriptive analysis, empirical study and critical analysis. The paper concludes with summarizing the results from the study.

Modelling the Effects of Unconventional Monetary Policy in a Heterogeneous Monetary Union

This paper focuses on the effects of the ECB’s unconventional monetary policy on the member countries of the euro area. The analysis is based on a Global VAR model, which allows to take into account mutual influences of processes in the countries of the currency union. Identification of unconventional monetary policy shock is conducted using a shadow interest rate which reflects changes in economic agents’ expectations following the announcement of unconventional monetary policy measures. The model is estimated using data for the euro area from 2007 to 2018 and covers all of the key instances of implementation of unconventional measures by the ECB. The results show that expansionary policy leads to a significant rise in output and prices in the euro area. Additionally, the effects of unconventional monetary policy are heterogeneous across countries: the response to unconventional monetary policy shock is insignificant in countries that are strongly affected by the crisis, and the effectiveness of the measures varies across countries with different levels of banking sector capitalisation. It was also found that the efficiency of unconventional monetary policy measures against deflation depends upon spillovers of the interaction between core and periphery countries in the monetary union.

The interactions between Hong Kong’s housing market and global markets upon unprecedented monetary policy changes

This paper explores whether the introduction of unconventional monetary policy measures re-shapes the interactions between Hong Kong’s housing market and global stock market and economic factors. It is found that, the interactions between Hong Kong’s housing prices and global stock markets attenuated during the conventional monetary policy period (CMPP), especially after the Asian Financial Crisis. The level of interactions with global factors reached the lowest during the transitional period between CMPP and the unconventional monetary policy period (UMPP). By contrast, the co-movements with global stock market factors had played a bigger role in explaining Hong Kong’s housing price variations during UMPP, especially at the time when the US, UK, EU, and Japan deployed QEs and/or negative interest rate policy. Nevertheless, such high level of integrations did not sustain as QE3 ended in the US. The findings yield important implications in view of recent central bank actions responding to the dim economic prospects due to the COVID-19 pandemic.

Unconventional Monetary Policy Measures and Money Markets: Estimating the Impact of Targeted Repo Operations on Asset Prices

Unconventional Monetary Policy Measures and Money Markets: Estimating the Impact of Targeted Repo Operations on Asset Prices

Sustainability of the Bank of Japan’s ETF Purchasing Policy

Abstract The Bank of Japan is the only central bank that holds enormous amounts of stocks of listed companies by purchasing ETFs via its unconventional monetary policy measures. The Bank of Japan has been buying ETFs for more than a decade and, seemingly, has no awareness that it has become a huge investor in the stock market. This article explains how this policy has potentially distorted market mechanisms and how it is difficult to find an exit strategy.

On the effectiveness of the European Central Bank’s conventional and unconventional policies under uncertainty

In this paper, we investigate the effectiveness of conventional and unconventional monetary policy measures by the European Central Bank (ECB) conditional on the prevailing level of uncertainty. To obtain exogenous variation in central bank policy, we rely on high-frequency surprises in financial market data for the euro area (EA) around policy announcement dates. We trace the dynamic effects of shocks to the short-term policy rate, forward guidance and quantitative easing on several key macroeconomic and financial quantities alongside survey-based measures of expectations. For this purpose, we propose a Bayesian smooth-transition vector autoregression (ST-VAR), using a measure of economic policy uncertainty as signal variable. Our results suggest that transmission channels are impaired when uncertainty is elevated. While conventional monetary policy and forward guidance can be less effective during such periods, quantitative easing measures seem to work comparatively well in uncertain times.

Non-linear cointegration between oil and stock prices: The role of interest rates

The Zero Lower Bound (ZLB) has been suggested as an explanation as to why oil and stock prices have become highly correlated post 2008. Our paper contributes to the literature on this topic by testing (i) whether there is a long-run relationship between oil prices and stock prices (measured by the MSCI World Index) that is non-linear depending on the interest rate levels and, if this is the case, (ii) whether the co-movement between them is stronger when interest rates are very low. To do so, we apply a cointegrating smooth transition regression approach using a global shadow rate as the transition variable to take into account the possible effects of unconventional monetary policy measures on the oil-stock price linkage. We find evidence in favor of the two hypotheses tested. These results have important implications for portfolio managers and investors, since the benefits of portfolio diversification by investing in oil would be lower in a ZLB context. In addition, from a policymakers’ perspective, the results could be revealing that, in this context, central banks could exert a greater influence than in “normal times” not only on equity prices, but also on global oil prices.

ECB's unconventional monetary policy and spillover effects between sovereign and bank credit risk

PurposeThe paper examines the impact of the deteriorating fiscal conditions of Eurozone countries on spillover effects on bank credit margins. It is investigated whether these effects have been reduced after European Central Bank’s (ECB) signaling of pursuing an expansionary, unconventional, monetary policy to address the debt crisis in Eurozone.Design/methodology/approachA general econometric panel model is applied to investigate spillover effects between Eurozone countries and bank credit margins. In total, three periods are examined: the period before the peak of the global financial crisis and the beginning of the Irish banking crisis, the period during the debt and bank crisis in Eurozone and the period after ECB's signaling of extremely aggressive monetary easing.FindingsAccording to empirical results, before the peak of the global financial crisis there was no substantial credit risk transfer from Eurozone sovereigns to banks. During the period of debt and bank crisis in Eurozone, the deterioration of the fiscal situation of Eurozone countries had a significant impact on bank Credit Default Swap (CDS) spreads. After ECB's signaling of extremely aggressive monetary easing, it does not seem to be any significant relationship between Eurozone sovereigns and bank CDS spreads. These findings reinforce the assessment that ECB's measures were effective, achieving the key objective of normalizing economic conditions and ensuring financial stability in Eurozone.Research limitations/implicationsA question is whether effects can change when the corresponding contraction will lead to a reinstatement of “normal” conditions. Would there be a reversal of risk premium trends in bond markets? Although the answer from casual observations seems to be negative, it is a valid research question to be examined. An interesting issue concerning the unconventional monetary policy measures implemented by ECB concerns the issues of moral hazard that they incorporate, something that could not be addressed. Another research perspective could be the use of the beta coefficient to measure the systematic and unsystematic risk of banking sector shares.Practical implicationsThe results have strong implications for ECB and European banking regulation. Regulators should mainly pay more attention to the amount and concentration of sovereign debt held by banks. Eurozone financial system could be less vulnerable to the sovereign credit risk. It raised the critical question of whether a more strict regulation is needed. Regulators should not intervene if not necessary, but they must prevent the transmission of crises between markets. This will likely bring trust to the developed countries' sovereign debt and the portfolios of the financial institutions, which hold most of this debt will be considered safe as well.Social implicationsThe conclusions provide a safe counterweight in various respects. First, the negative effects and the need to rapidly cease or limit such policies. Second, the financial stability aimed by ECB. Such policies contain the possibility of a subsequent moral hazard related to Member State and bank behavior. However, these contingencies need to be assessed with the benefits resulting from the restoration of financial markets and the disconnection between banking and sovereign credit risk. This leads Eurozone's financial system to become less vulnerable to the sovereign credit risk and therefore more safe, helping to restore confidence in the real economy.Originality/valueContribution in terms of methodology and conclusions. It offers important conclusions regarding the limitations of yields and volatility of CDS spreads. It examines the spillover effects of the fiscal situation of Eurozone countries on banking institutions by extending the existing methodology and introducing new questions focusing on the reaction of CDS market to the ECB monetary policy, the reduction of risk premiums at sovereign and banking level and the gradual reduction of interdependence between them.

Two Major Economic Crises in the Early Twenty-First Century and their Impact on Central Bank Independence

Abstract Two major economic crises in the early twenty-first century have had a serious impact on monetary policy and CB independence. Disruption in financial intermediation and associated deflationary pressures caused by the global financial crisis of 2007–2009 and European financial crisis of 2010–2015 pushed central banks (CBs) in major currency areas towards adoption of unconventional monetary policy measures, including large-scale purchase of government bonds (quantitative easing). The same approach has been taken by CBs in response to the COVID-19 crisis in 2020 even if the characteristics of this crisis differ from the previous one. As a result of both crises, CBs have become major holders of government bonds and de facto – main creditors of governments. Against rapidly deteriorating fiscal balances, CBs have become hostages of fiscal policies, which compromises their independence. Risks to the CB independence also come from their additional mandates (beyond price stability) and populist political pressures.

Disarray at the headquarters: Economists and Central bankers tested by the subprime and the COVID recessions

Abstract The article explores the discussions among economic modelers and central banks research staff and decision makers, namely on the adequacy of unconventional monetary policy and fiscal expansionary measures after the subprime crisis and as the COVID recession is developing. First, the article investigates the arguments, models and policy proposals of several mainstream schools of economics that challenged the traditional Chicagoan orthodoxy based on Milton Friedman’s views, and developed the Lucas Critique, the New Classical synthesis and Real Business Cycle approach that replaced monetarism as the main rivals to old-time Keynesianism. Second, the transformation of Real Business Cycle models into Dynamic Stochastic General Equilibrium (DSGE) models is mapped, as it extended the ideas of the iniquity of government intervention and unified academic and central bank research. Yet, a battery of criticism was levied against the DSGE models and, as the debate emerged over quantitative easing and other tools of unconventional monetary policy, the need for policy pragmatism shattered the previous consensus. The article then proceeds to discuss how the leading mainstream academic economists reacted to changes in central banks‘ practices, noticing a visible dissonance within Chicago-school and DSGE economists, as well as major contortions of central bankers in order to justify their new postures. The article concludes with a call for an extensive menu of fiscal, industrial and innovation policies in order to respond to recessions and structural crises.

Why central banks announcing liquidity injections is more effective than forward guidance

AbstractWe distinguish the announcement effects of conventional and unconventional monetary policy measures on macroeconomic variables using a high‐frequency data set that measures the impact of the European Central Bank's monetary policy decisions. For the period 2002 to 2019, we show that conventional and unconventional monetary policy measures differ considerably in their impact on inflation. While conventional measures show the expected response, that is, an interest rate cut increases inflation, unconventional measures appear to generally have no significant influence. However, this does not hold for quantitative easing, which is found to have a similar influence on inflation as the conventional interest rate changes.