Unconventional Policy Research Articles

Measuring the Short-Term Effects of the ECB’s Unconventional Monetary Policy on Financial Markets: A Review

Following the financial crisis in 2008, the ECB implemented various unconventional policy measures to respond to the tensions on the market. These measures had a significant impact and short-term effects on financial markets. This literature review provides a extensive overview of the empirical literature dealing with the short-term effects of this unconventional monetary policy using event studies. Furthermore, a methodological analysis of conducted event studies is carried out. First, we review empirical event studies focusing on the effects on the bond market, the stock market, as well as on international spill-over effects. Secondly, we carry out a methodological analysis of event studies that estimate the announcement effects of the ECB’s unconventional measures. In this context, the analysis provides insight into the process of determining relevant events, the categorization of those, measuring the surprise component, and determining control variables. By comparing the different approaches applied, we give a comprehensive overview of similarities as well as differences in the methodology used.

Macroeconomic Effects of Federal Reserve's Unconventional Monetary Policy: A Computational Linguistics Approach

I propose a new approach to estimating the Federal Reserve’s unconventional monetary policy after the Great Recession. During the 2009-2015 U.S. zero lower bound period, the Federal Reserve resorted to unconventional policies like forward guidance and large-scale asset purchases. I quantify these policies by creating an unconventional monetary policy index using computational linguistics and machine learning on the FOMC meeting minutes. This index provides information on how much of the discussion during each meeting was pertaining to the large-scale asset purchase program and forward guidance. A positive shock to this measure can be interpreted as more discussion about this topic in particular meeting. Using such shocks as instruments in a in a factor-augmented vector auto-regression framework, I find that the Fed’s unconventional policy had its desired effects of stimulating the economy, by increasing output and reducing the unemployment rate. I also find significant, albeit less, effects on the financial markets.

Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic

The COVID-19 pandemic led many emerging market central banks to adopt, for the first time, unconventional policies in the form of asset purchase programs. In this study, we analyze the effects of these announcements on domestic financial markets using both event studies and local projections methodology. We find that these asset purchase announcements lowered bond yields, did not lead to a depreciation of domestic currencies, and did not have much effect on equities. While the immediate effect of asset purchases appears positive, further consideration of the risks and longer-term effects of unconventional monetary policies is needed. We highlight the trade-offs involved with the implementation of these measures, and discuss their risks. This working paper adds to the debate on how asset purchase programs should be a regular part of the emerging market policy toolkit.

Understanding the effects of growing central bank balance sheets on investment

AbstractWhat role does unconventional monetary policy – and particularly unconventional policies such as private asset purchases under quantitative easing or lender of last resort scheme – play in influencing economic growth directly? The literature looks at the effects of post‐2007 central bank asset purchases on GDP growth and – in limited cases – on investment. Yet academics and central bankers have not tried to understand the effects of private securities purchases alone, while controlling for broader macroeconomic effects. This article summarises the existing literature, documenting the widespread use of private securities purchases by central banks across the world. The literature shows the potentially beneficial effects of these purchases, pointing the way for further scholarly work about central banks' private securities purchases.

Do Unconventional Monetary Policy Measures Make a Difference?

The COVID-19 pandemic has served as a turning point for central banks in the formulation of their monetary policy in achieving its core mandates. Central banks (CBs) can often act far faster than other institutions and pass policies that can keep the economy buoyant amid harsh economic conditions. Traditionally, CBs have used their main policy tools to address potential hurdles during times of crisis such as a lack of domestic liquidity, heightened possibility of bank runs, crashing financial markets, and a higher cost of borrowing. These main policy tools come in the form of rate cuts, reserve requirement cuts, and exceptions, and other similar measures. However, COVID-19 presents a huge challenge as it impacts the real economy directly, affecting the supply and demand side substantially with a recovery that is pegged as slow for the remainder of the year. As such, the BSP and other CBs have had to go beyond the traditional ambit of policy tools and venture with other policies that may be unconventional but may quell unrest in the financial markets. This study aims to determine the causal impact of unconventional policy decisions made by the BSP on key financial market variables. It was determined that the unconventional policies done by the BSP were able to lower the rate of borrowing among banks as well and increase investor confidence in the return performance of Philippine bonds. In contrast, this study finds that unconventional policies have no significant causal impact on the equities market and the FX market.

Financialization and unconventional monetary policy: a financial-network analysis

Over the last decades, both advanced and emerging economies have experienced the emergence of the phenomenon known as financialization, that, until some time ago, was generally considered beneficial for the economy. The 2007-2008 crisis and the severe post-crisis recession called into question the assumptions underlying the positive perception of the role played by financialization in the economy. In particular, the effects of financialization on financial stability and inequality are now widely recognized. A recent debate focused on the effectiveness of unconventional monetary policy tools in transferring their effects on the financial sphere to the economic sphere (e.g., via stimulating the transmission of resources from the banking system to the real economy). Among these unconventional policy measures, Quantitative Easing (QE) 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 QE may generate net flows of additional resources to the real economy. Second, to what extent QE may also alter the pattern of intra-financial exposures among financial actors and what are the implications in terms of financialization. Here, we address these two questions by mapping and analyzing the euro area multilayer macro-network of financial exposures among institutional sectors across financial instruments (i.e., loans, bonds, equity, and insurance and pension schemes) and we illustrate our approach on recently available data. We then test the effect of the implementation of ECB’s QE on some novel measures of financialization that we derive from the time evolution of the financial linkages in the multilayer macro-network of the euro area.

Mental health policy issues and development in Lithuania

Abstract Background Lithuanian has experienced rapid and relatively successful transition to capitalism and transatlantic-Western values and practices in recent decades. Suicide and legal alcohol consumption rates remain the highest in the EU and OECD, and Lithuania's Positive emotions index score has been consistently amongst the 10 lowest in the world in recent years. Emigration rate is the highest in the EU and OECD, social inequality is amongst the highest in the same groups. Despite a relatively strong economy these changes are not automatically transferred to better social and emotional well-being. Methods This unconventional situation calls for strong and unconventional policy responses in the area of mental health, amongst others. Health impact assessment using theory-based approach and desk research. Results Recent attempts include strategic reorientation towards social and emotional well-being, stronger focus on prevention and promotion and primary care, intensifying efforts to reduce suicide rates, and implementation of strong regulatory measures to reduce alcohol use. Suicide rates have been declining since 2013 but remain high. Effort is made to implement best practices in media reporting, recognition and providing appropriate help for those in suicide crisis, expanding prevention efforts. Conclusions Finally, WHOs “best buys” in alcohol control were implemented since 2017, including steep increases in excise taxes, ban on alcohol advertisement, increase of allowed age, reducing alcohol trading hours and others. This resulted in the steepest decline of legal alcohol consumption in decades. The chosen policy route may be called iterative policy-making, whereby improvements are made along the way, which allows for quicker policy decisions and results. Key messages Mental health policies need to be based on the socio-political context of the specific country. Smaller countries such as Lithuania might benefit form flexible approaches to mental health policies.

The role of time‐varying risk premia in international interbank markets

AbstractWe study international interbank spreads within a no‐arbitrage dynamic term structure model and attempt to disentangle time‐varying risk premia in the interbank market for major currencies. Our results suggest that, at the peak of financial crisis, the interbank spread was clearly driven by liquidity risk. In the aftermath of the crisis, credit risk has become the dominant driver of the spread. This effect is stronger in the Euro and UK markets, due to the escalation of the European sovereign debt crisis, and weaker in the Japanese market which experienced remarkably low credit pressures. Furthermore, we assess the effectiveness of monetary policy actions and demonstrate that the establishment of the unconventional policy programmes led to the deterioration of liquidity risk in the interbank market, and the policy of major Central banks to substantially cut interest rates kept credit pressures at low levels. We also partition the spread into expectation hypothesis and time‐varying risk premium components and reject the hypothesis of constant risk premium. We find strong evidence of predictability inferred from the interbank spread model with time‐varying risk premia.

Unconventional Monetary Policy and Wealth Inequalities in Great Britain*

AbstractThis paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched, as the policy rate reached the zero‐lower bound. Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant and lingering effects on wealth inequality: the shock raises wealth inequality across households, as measured by their Gini coefficients, percentile shares and other standard inequality indicators. Additionally, we explore the effects of different transmission channels simultaneously. We find that the portfolio rebalancing channel and house price effects widen the wealth gap, outweighing the counterbalancing impact of the savings redistribution and inflation channels. The findings of our analysis help to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.

COVID-19: A Make or Break Moment for Global Policy Making.

The COVID‐19 pandemic poses an unprecedented set of challenges to governments, policy makers and citizens; lockdowns and social distancing measures generate significant economic losses, fuel public expenditures and deficits and will no doubt significantly boost public debts. The burden of such measures is also likely to be disproportionately felt by the worse‐off members of society and will weigh heavily on future generations. This is both unfair and runs the risk of politically destabilizing the recovery process. To avoid these outcomes unconventional policy measure such as taxes on private wealth and digital economic activities, but also public debt monetization, should be considered. From a political perspective, governments should realize that policy coordination is the only successful exit strategy following a systemic economic shock. While the EU is moving faster than we are accustomed to, it still seems unable to respond quickly enough given the nature of the circumstances. In this picture, the G‐20, provided it acts quickly over the coming months, could emerge as the sole global policy forum left on the playing field that can avoid that national interests will prevail eventually producing collectively sub‐optimal results in the long‐run.

The EU’s Most Influential Economic Policy-maker: Mario Draghi at the European Central Bank

Abstract This article assesses the legacy of Mario Draghi as president of the European Central Bank (ECB) from 2011 to 2019, with particular reference to the Greek’s sovereign debt crisis. Most macro-economic indicators improved over the course of Draghi’s tenure at the ECB, including inflation, budget deficits, yield spreads among euro-area borrowers and unemployment. Draghi played a decisive role in turning the tide on the crisis of confidence that afflicted the euro area and threatened the survival of Europe’s single currency in the wake of Greece’s sovereign debt crisis. Yet the ECB’s unconventional policies prompted sustained controversy and contributed to a low level of trust in the central bank among people in the euro-area member states. The focus of controversy has been on possible asset-price bubbles and ‘hidden’ transfers between euro-area member states. When and how to normalize its policies is a major challenge for the ECB, as it is for other major central banks that adapted similar policies in response to the global financial crisis.

On the (Un)Feasibility of Fedcoin: Implementing a Central Bank Backed Digital Currency in the United States

The rise of cryptocurrencies has sparked a global discussion on central bank backed digital currencies (CBDCs). In a 2014 blog post, J.P. Koning proposed that the Federal Reserve launch its own blockchain based digital currency: Fedcoin. While the technology behind cryptocurrencies was supposed to liberate monetary policy from central bank control, it might instead be the key to strengthening the Federal Reserve’s power. In the post-crisis era of excess reserves and low inflation, the Federal Reserve’s traditional monetary policy tools of open market operations and reserve requirements break down, leading to a dependence on new or unconventional policies such as quantitative easing, forward guidance, and the interest rate on reserves. Fedcoin could be a powerful new monetary policy tool which gives the Federal Reserve a direct transmission mechanism by setting interest rates on Fedcoin – a tool which many have touted as a solution to the zero-lower bound. Many impediments stand in the way of Fedcoin’s implementation, however, including the Mundell-Fleming policy trilemma, dependence on cash in the United States, displacement of the banking sector, and the Federal Reserve’s statutory mandate. This paper looks at law, economics, and technology to discusses Fedcoin design considerations, including: 1) the desirability and mechanics of implementing Fedcoin as a DLT-based token, 2) the monetary policy implications under economic theory, 3) feasibility of Fedcoin’s adoption and moving towards a cashless society and 4) the Federal Reserve's statutory authority to create a digital currency.

The Non-linear Effects of the Fed's Asset Purchases

The Federal Reserve responded to the global financial crisis of 2008 with the deployment of new monetary policy tools, the most notable of them being the expansion of its balance sheet. In a recent paper, Weale and Wiladeck (2016) show that the asset purchases were effective in stimulating economic activity, inflation and asset prices. In this paper, we show that the results of asset purchases are state-dependent: large scale purchases are effective only when financial markets are impaired. Using an estimated threshold vector autoregressive model conditional on the volatility regime, we show that an increase in the balance sheet has expansionary effects on GPD and inflation when volatility is high, but not when it is low (in which case its effects become mostly insignificant). We argue that high volatility can be interpreted as a proxy of market dysfunction, and therefore only when this transmission channel is active is unconventional monetary policy particularly effective. This suggest that models of transmission mechanisms of unconventional policies that are based on asset purchases should focus more on the market functioning channel and not only on the portfolio rebalance channel.

The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections

AbstractMotivated by a seemingly persistent “twin‐high” phenomenon in Latin America, we present a novel theoretical framework that has linkages between three institutions (education, criminal justice, and credit) to study policy‐pertinent research questions with regards to whether police spending has the potential to serve as an unconventional policy tool for macroeconomic management. Based on a stylized parameterization, we find formal and illegal human capital to share common cyclical properties, which can be "decoupled" under a rule‐based regime to police spending. This nonetheless comes at a cost of a greater propagation of the credit friction‐induced financial accelerator effect.

A Conceptual Model for the Integrated Policy Framework

In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

Short-term exposure to ambient air quality of the most polluted Indian cities due to lockdown amid SARS-CoV-2

Air pollution has happened to be one of the mounting alarms to be concerned with in many Indian cities. COVID-19 epidemic endow with a unique opportunity to report the degree of air quality improvement due to the nationwide lockdown in 10 most polluted cities across the country. National Air Quality Index (NAQI) based on continuous monitoring records of seven criteria pollutants (i.e. common air pollutants with known health impacts e.g. PM10, PM2.5, CO, NO2, SO2, NH3 and O3) for a total of 59 stations across the cities, satellite image derived Aerosol Optical Depth (AOD) and few statistical tools are employed to derive the outcomes. NAQI results convey that 8 cities out of the 10 air quality restored to good to satisfactory category during the lockdown period. Within week+1 of the lockdown period, PM10 and PM2.5 concentrations have suppressed below the permissible limit in all cities. CO and NO2 have reduced to about −30% and −57% respectively during the lockdown period. Diurnal concentrations of PM10 and PM2.5 have dropped drastically on the very 4th day of lockdown and become consistent with minor hourly vacillation. In April 2020 the AOD amount was reduced to about 36% and 18% in contrast to April 2018 and April 2019 respectively. This add-on reporting of the possible recovery extent in air quality may help to guide alternative policy intervention in form of short term lockdown so as to testify whether this type of unconventional policy decisions may be put forward to attain a green environment. Because, despite numerous restoration plans, air pollution levels have risen unabated in these cities. However, detailed inventory needs to be focused on identifying the localized pollution hotspots (i.e. source contribution).

Unconventional Monetary Policy Surprises: Delphic or Odyssean?

Central bank communication could be interpreted in two ways, either as central bank's commitment to a future action, known as Odyssean guidance, or its forecast of future economic conditions, known as Delphic guidance. The empirical literature has identified the Delphic and Odyssean components of forward guidance policies. I show that another unconventional policy tool, large-scale asset purchases, can also be empirically decomposed into Delphic and Odyssean components, and these two components have opposing impacts on macroeconomic expectations in the US along with other advanced and emerging market economies. Finally, I estimate the asset price responses to Delphic and Odyssean policies.

Zero Lower Bound and negative interest rates: Choices for monetary policy in the UK

There have been relatively few analyses of the policy context and consequences of a Zero Lower Bound (ZLB) for nominal interest rates. This paper sets out monetary policy alternatives, including negative interest rates, a revision of the inflation target, and rendering unconventional policy instruments such as QE conventional (permanent). Following extensive discussion of policy options, we set out a model that explores the impacts of the real policy rate on economic growth, employment and inflation, with particular attention to the British economy. We use a Time-Varying Structural Vector Auto-regressive (TVSVAR) Model where the sources of time variation are both the coefficients and variance–covariance matrix of the innovations. It was found that real rates have significant implications for real growth, the labour market and price stability even when monetary policy was constrained at the ZLB in nominal terms. The study additionally applies a discrete break in the data to focus on the Post-Global Financial Crisis and ZLB period. This indicates that the effectiveness of real rates did not diminish and this has important implications in terms of a policy approach which seeks to exploit real negative rates.

US and EU unconventional monetary policy spillover on BRICS financial markets: an event study

This paper examines the effects of monetary authorities in Europe and US unconventional policy announcements on emerging stock markets (BRICS). An event study methodology is used to analyse the impact on the sectors of interest: consumer, financials, and materials. The analysed abnormal returns are significant during some events and are also dependent on the announcing central bank authority, as well as the sector and country investigated, linking the announcements to spillover effects in those countries. In terms of differing magnitude effects regarding the announcements of the central banks, no significant pattern was found. However, magnitudes seem to be unexpectedly, but not always significantly, higher during FED statements.

Monetary Policy Transmission to Russia and Eastern Europe

In this paper, we argue that the ECB’s unconventional monetary policy announcements have generated significant spillover effects in Russia and Eastern Europe. The hypothesis is tested using OLS estimations of event-based regressions on monetary policy event dummies and seven financial variables in eleven East European countries including Russia. Overall, the empirical results associate the ECB’s unconventional policy announcements with the appreciation of East European currencies, rising stock market indices as well as falling long-term government bond yields and lower sovereign CDS spreads in Eastern Europe and Russia. Bilateral integration with the eurozone is a key determinant of the strength of spillovers, with spillovers strongest in non-euro EU countries and weakest in non-EU East European countries. Furthermore, we find differentiated strength of spillovers to Russia compared to other non-EU East European countries, which we attribute to its fixed exchange rate regime. We also argue for the presence of portfolio rebalancing and confidence transmission channels.