Monetary policy

Clemens Jobst, Stefano Ugolini, 23 June 2015

Central banks today provide liquidity exclusively through purchases of (mostly) government bonds and through collateralised open-market operations. This column considers the evolution of liquidity provision by central banks over the past two centuries, and argues that there are alternative approaches to those that are focused on today. One such alternative is a revival of the 19th century practice of uncollateralised lending. This would discourage market participants from relying on informational shortcuts, and reduce the likelihood that informational shocks trigger collateral crises.

Arvind Subramanian, 15 June 2015

There is a lot of discussion of the right course of monetary policy for India. In this column, India’s Chief Economic Adviser argues that the country’s real policy interest rates have diverged significantly for consumers and producers, and are unusually high for the latter. The real rate is 2.4% based on the consumer price index, but 7.5% based on the GDP deflator. There is a clear need for more consideration of the appropriate measure of restrictiveness in these unusual times.

Olivier Blanchard, 15 June 2015

Greece’s negotiations with its creditors is at a critical point. This column, by the IMF’s Chief Economist, discusses the offer made to the Greek government. For the deal to work, the Greek government needs a credible budget plan for attaining the targeted surpluses, and European creditors need to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. Under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates.

Pierpaolo Benigno, Salvatore Nisticò, 15 June 2015

In the aftermath of the Global Crisis, many central banks have engaged in unconventional purchases of risky securities. Such operations can entail possible losses on their balance sheets. This column argues that neutrality of open-market operations holds only in specific policy regimes, such as when central banks’ losses are covered by taxes levied on the public sector. In absence of such support, losses should be resolved through a prolonged increase in inflation.

Jens Christensen, Signe Krogstrup, 10 June 2015

Quantitative easing (QE) is thought to work by reducing expected future short-term policy rates and the supply of long-term bonds. This column argues that a third channel may be at work, namely a reserve-induced portfolio balance channel. It operates through the increase in central bank reserves on commercial banks’ balance sheets and is independent of which assets the central bank purchases. Central banks can implement QE programmes through purchases of other assets than long-term bonds and still reduce long-term yields.

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