Monetary policy QE and other tools
19 important questions on Monetary policy QE and other tools
What is the prime objective of the monetary central bank?
Increase interest rates: Increase savings, withdrawal money from circular flow. Slows economic growth. Decreases rate of investment in capital assets.
What is the money multiplier effect? Did it perform during the crisis?
M1 = (1+c) / (rr +er + c) * M0
c = currency
rr = required reserves
er = excess reserves
Explain how the monetary framework works (instruments, operational target, intermediate target, ultimate target)
- Instruments (policy rate, asset purchases)
- Operational target (money market interest rate, central bank reserves)
- Intermediate target (monetary aggregate (M3), exchange rate, inflation estimates --> these are partially driven by externalities
- Ultimate goal --> price stability (inflation ( gdp growth, financial stability)
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How do the mandates of central banks differ?
- FED in the US has a dual mandate (Price stability (inflation target) & economic target (employment) This dual mandate may create tension
- The ECB only has a single mandate for price stability (Inflation)
- The bank of England has an inflation target ( also use the exchange rate )
- Small countries (Denmark) but also China have an Exchange rate target (peg to anchor currency). To import stability form the euro area in case of Denmark and dollar in case of China.
What is the difference between Core Inflation and HICP. Where should the ECB focus on?
- HICP is the Harmonised Index Consumer Prices, or headline inflation)
- Core inflation excludes raw food and commodity prices.
The HICP is easy to explain to the public. For instance the 60% of the drop in HICP is cause by the drop in oil prices. The public can understand this. The core inflation is more stable put harder to interpreted. Core inflation can be misleading for consumers, who will mistrust figures which exclude many prices they have to pay for.
What are the differences in forward guidance in monetary policy?
- Open-ended guidance (no particular date)
- Time-contingent guidance (particular date)
- State contingent, threshold guidance (as long as unemployment is lower than x %) --> now more a range of indicators instead of just employment
- Qualitative guidance ( one based on number of economic thresholds)
What has been the effect on the yield curve of recent economic monetary policy in the Euro area and the US?
- Yield curve flattened in the Euro area
- The Euro rate decoupled from the US rates. Where US rates are expected to grow, the euro rates are still flat.
What is the difference between a corridor monetary policy and a floor system? What do we have nowadays?
The Euro area follows a two pillar influence strategy. Explain how that works.
- The monetary policy strategy looks at two sets of indicators: the economic indicators (output and components, demand, labor market conditions, etc. ) and the monetary indicators (finacials such as money based inflation indicators, liquidity measures, etc.)
- They proces this information. The different indicators are used to model future projections.
- The projection are analysed based on the same indicators: 1. Economic analysis (assessment short&medium term determinants inflation) 2. Monetary analysis (monetary trends with the focus on long term)
- Governing council makes the monetary policy decision aimed at influencing price stability
What is the reaction of the ECB to the crisis with regard to the money marker)
- Narrow corridor (reduce the volatility)
- Supply massive liquidity
- Drop the intrest rate to the floor (lending rate to the ECB)
The effect of the liquidity supply is was that in 6 months the money market rates dropt severly
What is the reaction of the ECB to the failing money multiplier ?
Are QE programs effective?
What makes the transmission mechanism from policy rates to prices so complex?
What does the fragmentation of the euro area loan rates mean?
What is unconventional monetary policy?
- Credit easing (2007 - 2014)
- - Liquidity & Funding risk (longer-term refinancing operations, extension of collateral risk (.i.e. banks could borrow with weaker collateral)
- - Credit supply banks (Very long Term Refinancing Operations VLTROs)
- - functioning of bond markets (securities market program (SMT) and outright monetary transactions (OMT))
- Quantitative easing (2015-2016)
- - Expanded asset purchasing programme (CB, ABS, government bonds)
What is the expectations channel of QE?
What have researchers calculated the impact of QE on bond yields to be in the US?
Through which channels did QE have an effect?
What is the DNB policy stance toward QE?
- Strong medicine, uncertain outcome
- There are challenging risks: (negative side effects, communication, moral hazard)
- All monetary policy should have the following conditions (Termporary, Credible, within the euro system)
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