Joyce, et. al Quantitative easing and unconventional monetary policy
3 important questions on Joyce, et. al Quantitative easing and unconventional monetary policy
What was the aim of monetary policy before the crisis?
The aim of monetary policy was to achieve low and stable inflation, the policy framework was inflation targeting, the instrument was a short-term interset rate at which the central bank provided funds to banks or the interbank market and the impact of this official rate on market rates and the wider economy was reliably quantified
Why have banks turnend to unconventional monetary policy after the crisis?
There were two main challenges after the crisis:
Central banks hold on to the belief that when recovery occurs, conventional monetary policy will achieve price stability and financial stability. Central banks have turned to unconventional monetary policy to reach that point! So it has became not only about setting a price (policy rate) but also focused on the size of central bank balance sheets.
- Conventional monetary policy did not prevent asset pricing bubbles from occurring
- a zero lower bound nominal rates and disconnection between official rates and market rates(because bank solvency problems) meant that conventional questioned traditional monetary policy
Central banks hold on to the belief that when recovery occurs, conventional monetary policy will achieve price stability and financial stability. Central banks have turned to unconventional monetary policy to reach that point! So it has became not only about setting a price (policy rate) but also focused on the size of central bank balance sheets.
Name examples of unconventional monetary policy (4)
- negative interest rates
- suspension of changes to inflation targets
- massive expansion of central banks balance sheet ("credit easing --> buying of mortgage backed securities by the FED)
- influencing interest rates other than the usual short term (Operation twist--> sell short-term government bonds and use proceed to buy long term bonds, driving up the price lowering long-term interest rates)
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