Week 7 Deck Flashcards
Explain liquidity provision at the BoE and the fed in terms of during covid and the GFC
BoE
- Increased standing facilities than ‘normal times’
- In response to the covid-19 crisis, BoE introduced new lending programmes
- Covid corporate financing facility (CCFF) - BoE buys short-term debt from large companies to allow them finance their short-term liabilities - Support corporate finance markets and ease the supply of credit to all firms
• During the 2008 global financial crisis (GFC)
- Introduced discount window facility
- Banks can borrow up to 30 days - ie. Short term liquidity support
Fed
• During the covid 19 crisis, Fed set up a number of liquidity facilities to financial markets:
○ Pay check protection program liquidity facility
○ To help small businesses
• Main street lending program (MSLP)
○ A set of five facilities
○ Support lending to both small and mid sized businesses and non-profit organisations
• Team asset-backed securities loan facility
○ Set in March 2020 to support flow of credit to consumers and businesses
○ Enables insurance of asset backed securities (ABS) backed by student loans etc
• Discount window expansion
○ Primary credit rate lowered by 150 basis points to 0.25 percent
○ Borrowing terms extended for up to 90 days
• During the 2008 GFC, the Fed implemented unprecedented increases in its lending facilities to provide liquidity to the financial markets
- Discount window expansion
- Fed lowered discount rate to 50 basis points above funds rate
- Term auction facility
- Loans made at a rate determined through competitive auctions
- New lending programs
Providing funds to assist J.P Morgan purchase Bear Stearns
Explain the differences between Large-Scale asset Purchase, the objectives and QE and its objectives
• CB purchases of longer-term financial assets
○ Government long term bonds (QE)
○ Corporate bonds
• Objective is to reduce financial frictions and reduce long term interest rates
• CB’s large scale asset purchases (LSAP):
- Gives financial markets confidence
- Injects money into the economy
- Influences bank lending and spending in the economy
- Can help CB's meet their monetary objectives
Explain large scale asset purchases at the BoE during covid and the objectives (2)
• BoE LSAP programme include: gilt purchases, corporate bond purchases, Term Funding Scheme (TFS)
• At the onset of the covid-19 crisis:
- Launched a new term funding scheme with additional incentives for SME lending (TFSME)
- Asset purchases of £200 billions of gilt and corporate bonds
- Carried out at a record pace of £13.5 billion per week as shown by figure 2
• In June 2020, a further £100 billion of gilts purchases was done by the bank
• Objective of the asset purchases is to:
- lower long term interest rates, consequently stimulating the economy - Counteract any tightening of the monetary and financial conditions that may result from the gilt market decisions
Explain the BoEs LSAP programme during the GFC
• During the 2007-2009 global financial crisis (GFC)
○ BoE adopted QE in March 2009
○ During the crisis the BoE had a ‘bank rescue package’ that totalled £500cbillion for entire banking system
○ Of that, £200 billion was made available by banks through special liquidity scheme
○ As of February 2017:
- Gilt purchases amounted to £445 billion
- Corporate bond purchases stood at £7.7 billion
- £42.9 billions had been drawn in the TF
Explain LSAP at the Fed during the covid-19 crisis
• During the covid-19 crisis the Fed:
○ Purchased U.S Treasury securities worth approximately $1.7 trillion between mid-march and the end of June 2020
○ Increased its purchases of mortgage-backed securities as displayed in figure 6
○ Since June 2020, Fed continued carrying out LSAP
Explain the three new asset purchase programs introduced to lower interest rates for particular types of credit
- QE1
- Government sponsored entities purchase program which purchased $1.2 trillion mortgages backed securities (2008)
- Large scale purchases of US Treasury securities
- Asset purchases under QE1 totalled about $1.725 trillion - Quantitative easing (QE) 2 - purchased $600 billion long term treasury securities ($75 billion per month) aimed at lowering long term interest rates (2010)
QE3 - $40 billion mortgage-backed plus $45 billion long term treasuries (2012)
Explain the ECB responce to covid 19 and GFC
• In response to the covid-19 crisis:
- Launched the pandemic emergency purchase programme (PEPP) - Temporary asset purchase programme of private and public sector securities - Purchases of a total of 1,350 billion euros up to end of June 2021
• During the 2007 - 2009 GFC and Eurozone crisis:
- ECB faced political and legal opposition to asset purchases
- First large QE program occurred In January 2015
Quantitative easing versus credit easing
• During the 2008 GFC and covid-19 crisis, CBs became very creative in assembling a host of new lending facilities to help restore liquidity to different parts of the financial system
• This resulted in the expansion of the CBs balance sheet as show by Figure 7: quantitative easing - Lending to a huge increase in the monetary base • Could make potential argument for credit easing Altering the composition of CB balance sheet in order to improve functioning of segments of credit market
Explain forward guidance
- This involved communication from monetary policymakers about their economic outlooks and policy plans (‘open mouth operations’)
- Objective is to manage financial markets expectations of future short term interest rates
- Two types of commitment to future policy actions:
- Conditional - Unconditional
Explain BoEs forward guidance
• BoE launched forward guidance in 2013: conditional on future developments
• In august 2020 a new forward guidance - Provided commitment not to tighten MP until is appropriately - The economy is on the way to recovery Reinforces current market expectations of a low bank rate for some time
Explain the Feds forward guidance
• By committing to the future policy action of keeping the federal funds rate at zero for an extended period:
- The Fed could lower the market's expectations of the future short-term interest rates - Thereby causing the long-term interest rate to fall
Currently, the Fed intends to keep the Fed funds rate low for quite some time
Explain negative interest rates on bank deposits in terms of the Fed and BoE and ECB
- Commercial bank pays CBs to keep their money with them:
- Setting negative interest rates on bank’s deposits:
- Meant to stimulate the economy by encouraging banks to lend out the deposits they are keeping at the CB
- Thereby encouraging households and businesses to spend more
• However, there are doubts on the intended expansionary effect of negative interest rates on deposits
Fed
• Not adopting negative interest rates on bank's deposits
BoE
• Not adopting negative interest rates on bank's deposits in Less effective as MP tool to stimulate the economy
ECB
- Interest rates on bank deposits (deposit facility rate) has been negative since 2014
- Effect of ECB’s negative interest rate policy (NIRP) remains controversial
- The bankk in its speech of going negative: the ECB’s experience argues that NIRP has been effective in:
- in turning the Z;B into an effective lower bound well below zero
in supporting bank lending
stimulating the economy and raising inflation
Why is it important to study monetary policy at the zero lower bound?
- In normal times, CBs can attempt to reduce the real interest rate by lowering the policy rate
- But the policy rate, is stated in nominal terms, and therefore cannot fall below zero
- The zero floor on the policy rate is referred to as the zero lower bound (ZLB)
At the ZLB it is important to understand how nonconventional policies can be effective in stabilising the economy
Explain the relevant demand curves (3)
- The MP curve
○ Shows the relationship between the real interest rate set by the central bank and inflation rate - IS curve
○ Shows the relationship between aggregate output and the real interest rate when the goods market in equilibrium - Aggregate demand curve (AD)
○ Shows the relationship between the inflation rate and the quantity of aggregate output when the goods market is in equilibrium - The AD curve is derived from the MP from the MP and IS curves
What is the Taylor Principle?
CBs seek to keep inflation stable
To stabilise inflation, central banks, must raise nominal interest rates by more than any rise in expected inflation, so that the real interest rate r rises when π rises
If a central bank allows r to fall when π rises, then aggregate demand (AD) increases (Yad = AD) when π continues to rises:
