Transcript Unconventional Monetary Policy in Advanced Economies

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withdrawn until durable recovery is in sight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