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Unconventional Monetary Policy in Advanced Economies Vladimir Klyuev Research Department International Monetary Fund The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management. Outline • • • • Reasons for unconventional policies Unconventional approaches Effectiveness of unconventional policies Exit 2 Reasons to go unconventional • Large shock to aggregate demand • Strains in financial markets – Elevated spreads – Disrupted transmission mechanism – Frozen credit markets • Zero interest-rate floor 3 Central Bank Assets and Policy Rates 25 U.S. Fe de ral Re se rve (percent of 2008 GDP) Other Credit market interventions 20 Liquidity facilities Government securities 15 10 F e d F u n d s t a rg e t ra t e ( rh s ) 7 6 Europe an Ce ntral Bank (Percent of 2008 GDP) Other Credit market interventions Liquidity facilities Government securities 40 35 5 30 5 R e f in a n c in g ra t e ( rh s ) 25 4 3 20 3 2 15 2 10 1 0 Jun-07 0 Nov-07 May-08 Oct-08 Apr-09 Bank of England (Percent of 2008 GDP) Sep-09 7 25 1 5 0 Jun-07 0 Nov-07 May-08 6 20 Other (includes swaps) Credit market interventions Liquidity facilities 7 6 4 5 3 4 2 Apr-09 O v e rn ig h t t a rg e t ra t e ( rh s ) Other Credit market interventions Liquidity facilities Government securities 0 May-08 Oct-08 Apr-09 Sep-09 0 Jun-07 5 2 1 1 Nov-07 6 3 3 1 0 Jun-07 7 4 2 5 Sep-09 8 5 Government securities Oct-08 Bank of C anada (Percent of 2008 GDP) B a s e ra t e ( rh s ) 10 6 4 5 15 7 45 0 Dec-07 Jul-08 Jan-09 Aug-09 4 Options for unconventional policy • Commit explicitly to keeping policy rates low • Provide broad liquidity to financial institutions • Purchase long-term Treasury securities • Intervene directly in impaired credit markets 5 Commitment to low policy rates • Aims at anchoring market expectations that monetary stimulus will not be withdrawn until durable recovery is in sight • Easy to announce; useful when policy uncertainty is high • Effectiveness hinges on credibility; commitment has value only to the extent that it restricts future options • So far – United States and Canada 6 Provision of liquidity • Frictions in term money markets may necessitate going beyond overnight lending – Counterparty risk – Strains on liquidity – Shortage of acceptable collateral • Options include offering liquidity – – – – At longer maturities To a wider set of financial institutions Against shakier collateral Anonymously 7 Provision of liquidity • May be easy to implement; relatively little credit risk; no market risk; reduces risk of bank runs; if target is bank reserves, policy stance is easy to monitor and communicate • May not translate into credit to real economy if financial intermediaries are short of capital and seek to deleverage • All major central banks undertook a variety of measures in this category 8 23/Sep/09 29/Jul/09 03/Jun/09 08/Apr/09 11/Feb/09 17/Dec/08 22/Oct/08 27/Aug/08 02/Jul/08 800 07/May/08 1000 12/Mar/08 1200 16/Jan/08 21/Nov/07 26/Sep/07 01/Aug/07 06/Jun/07 Fed Liquidity Facilities ($ billion) 1600 1400 Currency swaps Security lending PDCF TAF Discount window Repo 600 400 200 0 9 18/Sep/09 24/Jul/09 29/May/09 03/Apr/09 06/Feb/09 12/Dec/08 17/Oct/08 22/Aug/08 27/Jun/08 02/May/08 800 07/Mar/08 1000 11/Jan/08 16/Nov/07 21/Sep/07 27/Jul/07 01/Jun/07 ECB Liquidity Facilities (euro billion) 1200 Forex lending Other lending LT refi Main refi 600 400 200 0 10 Credit Market Intervention • Purchases of private-sector assets by central bank – Commercial paper, corporate bonds, assetbacked securities • Credit to financial institutions for purchase of private securities – Securities can be used as collateral • Direct lending to non-financial private sector 11 Credit Market Intervention • May be more effective than going through banks when banks are broken • Signaling value – doing all you can • Can be selective, target particularly important and distressed markets • Presents logistical challenges • Exposes central bank to credit risk • Gives central bank role in credit allocation, may distort relative prices 12 23/Sep/09 19/Aug/09 15/Jul/09 10/Jun/09 06/May/09 01/Apr/09 25/Feb/09 21/Jan/09 17/Dec/08 12/Nov/08 08/Oct/08 03/Sep/08 30/Jul/08 500 25/Jun/08 600 21/May/08 700 16/Apr/08 800 12/Mar/08 06/Feb/08 02/Jan/08 28/Nov/07 24/Oct/07 19/Sep/07 15/Aug/07 11/Jul/07 06/Jun/07 Credit Market Intervention U.S. – large scale; BoE, BoJ, ECB – small scale Fed Intervention in Credit Markets ($ billion) 1000 900 Agency bonds Agency MBS TALF CPFF AMLF 400 300 200 100 0 13 Purchase of government bonds • Aims to flatten yield curve if low policy rates and commitment to keep them low does not translate into low long rates • Rates on government bonds are a benchmark for pricing many private securities • Banks can use extra reserves to extend new credit 14 Purchase of government bonds • • • • Familiar operations Minimum credit risk Some market risk May signal commitment to keep accommodative policy • Operate in deep, liquid markets – Substantial purchases may be needed to move rates – May have little impact on prices of private, risky securities 15 Bond Purchase Commitment • U.S. – $300 bn (2% of GDP) by endOctober, 2009 • UK – £175 bn (12% of GDP) by early November, 2009 • Japan – increased purchases to annual rate of ¥21.6 trillion (4% of GDP) – but net purchases are much smaller • ECB and BoC – no bond purchases 16 23/Sep/09 19/Aug/09 15/Jul/09 10/Jun/09 06/May/09 01/Apr/09 25/Feb/09 21/Jan/09 17/Dec/08 12/Nov/08 08/Oct/08 600 03/Sep/08 700 30/Jul/08 25/Jun/08 21/May/08 16/Apr/08 12/Mar/08 06/Feb/08 02/Jan/08 28/Nov/07 24/Oct/07 19/Sep/07 15/Aug/07 11/Jul/07 06/Jun/07 Fed Treasury Holdings ($ billion) 800 Notes and bonds Bills Supplementary Financing Account Lent to dealers 500 400 300 200 100 0 17 Credit Easing vs. Quantitative Easing • Quantitative easing refers to outright purchases of financial assets through the creation of excess settlement balances (that is, central bank reserves) • Credit easing refers to purchases of private sector assets in certain credit markets that are important to the functioning of the financial system but that are temporarily impaired. Source: Bank of Canada 18 What accounts for diversity? • Disagreement on usefulness of explicit commitment • Differences in country circumstances −Depth of recession Figure 4. Source s of finance for corporations 1/ (percent, average 2004-08) 100 90 80 −Impairment of financial system NonBank 70 NonBank 60 50 40 −Role of banks 30 −Institutional arrangements 10 Banks Banks 20 Banks 0 Euro area −Actions of non-monetary authorities NonBank United Kingdom United States Source: ECB Monthly Bulletin, April 2009; Haver Analytics. 1/ Breakdown of the sources of external financing of nonfinancial corporations. 19 Effectiveness of Unconventional Policies • Difficult to ascertain – Too much is going on at the same time – What is the counterfactual? – Substitutability between supported and unsupported assets – What matters – announcement or implementation? • Look at prices and volumes in supported and unsupported markets 20 Effectiveness • In our view, liquidity provision and credit intervention policies have largely been effective in alleviating market stress and facilitating flow of credit • Conditions in financial markets have improved • Spreads fell more in supported than in unsupported markets – Conforming vs. jumbo mortgages – High-rated vs. low-rated ABCP – TALF-eligible ABS vs. HEL ABS • Volumes picked up and maturity lengthened in ABCP markets 21 Improvement in broad liquidity indicators and in markets supported by the central banks 400 Figure 12: Thre e -month Libor - O IS spre ads (basis points) Euro 350 300 250 Figure 16. Comme rcial pape r spre ads ove r T-bill 7 AMLF CPFF 6 Sterling Non-fin <AA ABCP AA Canadian dollar 5 US dollar 4 Fin AA Non-fin AA 200 3 150 2 100 1 50 0 Jun-07 Dec-07 Source: Datastream. Jun-08 Dec-08 Jun-09 0 Jun-08 Sep-08 Dec-08 Source: Haver Analytics. Mar-09 Jun-09 22 9/3/2009 7/3/2009 5/3/2009 3/3/2009 1/3/2009 11/3/2008 9/3/2008 7/3/2008 5/3/2008 3/3/2008 1/3/2008 11/3/2007 9/3/2007 3 7/3/2007 4 5/3/2007 3/3/2007 1/3/2007 U.S. Interest Rates 8 7 6 5 10-year T-bond 30-year conforming Jumbo 2 23 4/3/2009 3/3/2009 Fed announces MBS purchase program 2/3/2009 1/3/2009 Jumbo vs. Treasury 12/3/2008 30-year conforming mtg vs. 10-year T-note Jumbo vs. conforming 11/3/2008 GSE takeover 10/3/2008 9/3/2008 8/3/2008 7/3/2008 6/3/2008 5/3/2008 4/3/2008 3/3/2008 2/3/2008 1/3/2008 12/3/2007 11/3/2007 10/3/2007 9/3/2007 8/3/2007 7/3/2007 4 6/3/2007 5/3/2007 4/3/2007 3/3/2007 2/3/2007 1/3/2007 U.S. Mortgage Spreads 5 Fed scales up MBS purchase program Fed announces MBS purchase program details 3 2 1 0 -1 24 Effectiveness of government bond purchases is questionable 100 75 Figure 18: Te n ye ar Gove rnme nt bond yie ld spre ads vs 10y Ge rman Bund (basis points) M a r 5: B o E a nno unc e s it will be gin purc ha s ing Gilts 50 M a r 18: F e d a nno unc e s Tre a s . purc ha s e pro gra m 25 0 -25 10y US Tre a s ury -50 10y UK Gilt -75 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Source: Bloomberg L.P. 25 Exit – What are the Concerns? • Banks hold large excess reserves • Will liquidity translate into fast credit growth and inflation? • Can the central bank control monetary conditions with outsized balance sheet? • Would balance sheet contraction be disruptive? • Will monetization of government deficits loosen fiscal discipline and push up long term yields? • Loss of central bank independence and credibility 26 23/Sep/09 19/Aug/09 15/Jul/09 10/Jun/09 06/May/09 01/Apr/09 25/Feb/09 21/Jan/09 17/Dec/08 12/Nov/08 08/Oct/08 03/Sep/08 30/Jul/08 25/Jun/08 1500 21/May/08 2000 16/Apr/08 12/Mar/08 06/Feb/08 02/Jan/08 28/Nov/07 24/Oct/07 19/Sep/07 15/Aug/07 11/Jul/07 06/Jun/07 Fed Liabilities ($ billion) 2500 Other Reverse repos SFA Reserves Currency 1000 500 0 27 Exit Can Be Managed • With large excess capacity, low rates and high liquidity will not lead to inflation outburst, as long as inflation expectations remain anchored • Central bank balance sheets will shrink to some extent automatically as financial conditions improve • Central banks have adequate tools to control monetary conditions even if balance sheets remain large • It is too early to actively tighten monetary policy, but exit strategies should be elaborated and communicated to the public 28 Really? • Many liquidity and credit market intervention facilities are priced above normal market rates and will shrink when spreads tighten • Long-term assets can be sold or will run down as they mature • Ability to pay interest on reserves allows central bank control its policy rate even with large excess reserves • For a given size of the balance sheet, reserves can be decreased by increasing other liabilities – – – – Reverse repos Government deposits Term deposits Central bank bills or bonds 29 Conclusions • Unconventional monetary policies were undertaken in response to an unprecedented aggregate demand shock and strains in the financial markets, such that traditional instruments were insufficient to deal with the crisis. • They included enhanced provision of liquidity to financial institutions, credit market interventions, and, in some cases, purchases of government securities and conditional commitment to keep policy rate low for an extended period of time. • Their scale and scope varied across countries depending on their circumstances. 30 Conclusions – continued • Unconventional measures appear to have been effective in alleviating market stress and boosting aggregate demand. • Unconventional measures do not imply an outburst of inflation down the line. Orderly exit is feasible. • It is to early to actively withdraw unconventional interventions, but exit strategy should be clearly communicated to the public. 31 Table 1. Unconventional Measures Undertaken by G-7 Central Banks Commitment to keep policy rate low Enhanced provision of liquidity to financial institutions Fed BoJ ECB BoE BoC Yes No No No Yes Yes Yes Yes Yes Yes TAF, PDCF, TSLF Broadened collateral; increased JGB purchases; introduced special fundssupplying operations Enhanced provision of longterm refi, broadened collateral Extended DW and OMO maturities; broadened collateral; introduced Special Liquidity Scheme Enhanced term PRA, introduced Term Loan Facility, broadened collateral Yes Yes Yes Purchases of covered bonds Asset Purchase Facility (commercial paper and corporate bonds) Term PRA Facility for Private Sector Instruments No Yes No Yes Provision of liquidity to credit markets Purchase of long-term securities CPFF, AMLF, MMIFF, MBS purchase program, TALF Yes Outright purchases of commercial paper and corporate bonds (with remaining maturity under one year) Yes Yes Treasuries and agency bonds Government bonds Gilts 32