topic 7 - unconventional policies Flashcards
what is the uncoventional monetary tool “lending operations”?
Central banks expanded their liquidity facilities to deal with both Disrupted Transmission Chain (in the early stages of the crisis, abundant liquidity to financial intermediaries was crucial in bypassing impairments in the interbank and money markets) and problems related to the Effective Lower Bound. Interventions included extending the maturity of the typical lending operations, expanding the set of eligible collateral and the set of counterparties, changing the lending terms (eg fixed rate full allotment) and imposing explicit conditions on loans to ensure the desired ultimate outcome (eg bank lending to non-financial private firms).
what is the unconventional monetary policy tool “asset purchase programmes”?
which accounted for large increases in central banks’ balance sheets aimed mainly at lowering long-term yields and thus easing broad financial conditions. In some cases (mainly relating to the purchase of private assets),they supported asset valuations affected by fire sales, or provided additional funds to ultimate borrowers by incentivising the securitisation of loans. Overall, APPs proved to be very effective tools.” (BIS 2019)
what is quantitative easing?
Quantitative Easing is intended to boost economic growth and prevent deflation at the zero-lower bound. The central bank buys a large amount of government bonds, asset-backed securities and high-quality corporate bonds with long maturities on the open market, with a view to flatten the yield curve, reduce risk premia, inflate asset prices and hence stimulate consumption and investment.
what does the simplified yield curve show?
the simplified yield curve traces the level of the rate of return on –say- a bond over the term to maturity. The longer the maturity the higher the yield needs to be to compensate for intervening shocks, inflation and uncertainty. So the curve definitely slopes upwards
what occurs to the yield curve when the short term yield rate is brought to zero for a positive term to maturity?
the entire curve MAY shift down in a parralel way but that is not necessarily the case, because the higher compensation may be sought on longer term lending; given the rise in uncertainty. the assumption of a parralel shift downwards can be considered as a first approximation nonetheless
what occurs when the longer term yield is lowered on some bonds?
As the longer term yield is lowered on some bonds (say government ones), investors may choose to buy similarly maturing corporate bonds thereby increasing the credit given to private non-banking firms. The process may be strengthened by aggressive purchases of any such bonds by the central bank, because this would drive up bond prices and consequently reduce their yield.
how does the portfolio balance channel affect the yield?
Rebalancing and seeking a higher yield may prompt purchasing other bonds thereby again providing the necessary credit. (Portfolio Balance Channel)
how does the bank credit channel affect the yield?
Banks’ lending in the form of loans may also be incentivized because the liquid portion of their balance sheets in tradeable securities has achieved a high market value (but a low yield). This should promote extending loans which are illiquid assets delivering however a higher rate of return. (Bank Credit Channel)
what events are negative interest rate policies most effective in dealing with?
They found that, overall, this strategy was effective in dealing with Effective Lower Bound events: long-term yields adjusted downwards inline with expectations of future short-term rates, thus providing the desired expansionary stimulus.
what does the effectiveness of QE primarily depends on?
the effectiveness of QE hinges primarily on affecting the public expectations, namely on the signalling channel. The signalling channel of QE refers to the fact that credible central bank’s announcements can successfully influence the public expectations regarding the future short-term interest rate path (Urbschat and Watzka, 2019). If the market agents accept that the short rates will remain low for a prolonged period of time (and therefore the bank lending standards will remain relaxed),they will be more eager to increase their consumption and investments.
what is forward guidance?
In a period of heighted uncertainty about the economic outlook and the ability of central banks to deal with the challenges Forward Guidance served to clarify central banks’ intentions with respect to future policy rate settings and to communicate their commitment to the pursuit of their mandates. (BIS 2019) if the market agents accepted that the short rates will remain low for a prolonged period of time (and therefore the bank lending standards will remain relaxed) they will be more eager to increase their consumption and investments
