Forward guidance in the UK
Spencer Dale, James Talbot 13 September 2013
The Bank of England’s Monetary Policy Committee has recently provided some explicit forward guidance regarding the future conduct of monetary policy in the UK. This column by the Bank's Chief economist explains how the MPC designed its forward guidance to respond to the unprecedented challenges facing the UK economy and argues that forward guidance allows the MPC to explore the scope for economic expansion without putting price and financial stability at risk.
At its meeting on 1 August 2013, the Monetary Policy Committee (MPC) agreed to provide state-contingent forward guidance concerning the future conduct of monetary policy. The aim was to provide more information to help financial markets, households and businesses understand the conditions under which the current stance of monetary policy would be maintained.
monetary policy, Central Banks, Bank of England, forward guidance
How to jumpstart the Eurozone economy
Francesco Giavazzi, Guido Tabellini 21 August 2014
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
The mantra is that once again it is up to the ECB to save the Eurozone. Quantitative easing is the last policy tool available to jumpstart the Eurozone economy. The longer the ECB waits before starting to buy government bonds, the further away will the recovery be. This analysis, however, overestimates the power of monetary policy.
Europe's nations and regions Macroeconomic policy
ECB, monetary policy, fiscal policy, quantitative easing, public debt, aggregate demand, Eurozone economy, stagnation
Identifying and quantifying monetary policy transmission through bank balance sheets
Kaoru Hosono, Daisuke Miyakawa 09 August 2014
In the wake of the Global Crisis, several central banks have adopted unconventional monetary policies. This column presents new evidence from Japan on the transmission of monetary policy through banks’ balance sheets. Overall, the evidence suggests that bank net worth affects loan supply, that the effect depends on monetary policy and economic growth, and that this bank balance sheet channel has a significant impact on firms’ financing and investment. Exiting from unconventional monetary policies when bank balance sheets are weak could thus have a severe adverse impact on investment.
How does monetary policy affect firm activities? While there is long-standing literature on this issue, the transmission mechanism of monetary policy is currently attracting renewed attention. The reason is that many central banks – including the US Federal Reserve, the Bank of England, the ECB, and the Bank of Japan – have introduced unconventional monetary policies such as quantitative easing and credit easing in the wake of the Global Crisis, and sooner or later will have to exit from these policies.
Financial markets Global crisis Monetary policy
monetary policy, Japan, global crisis, quantitative easing, unconventional monetary policy, balance sheets, financial accelerator, credit easing, bank lending channel
Will the US inflate away its public debt?
Ricardo Reis, Jens Hilscher, Alon Raviv 07 August 2014
Faced with daunting levels of public debt, it may be tempting to inflate away the burden. Some recent research has endorsed such a policy, but this column argues that it is infeasible. The rule of thumb that suggests an inflation rate four percentage points higher would reduce debt by 20% ignores creditor composition and maturity details, even if a 6% inflation rate were achievable. The hard truth is that there is no easy way out of debt.
Should the US Federal Reserve raise the inflation target from its current level of 2%? And will it? One benefit would be to make hitting the zero lower bound less likely, which would lead to less severe recessions, as Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro (2010), Daniel Leigh (2010), and Laurence Ball (2013) have argued on this website.
inflation, monetary policy, public debt, seignorage
Revisiting the pain in Spain
Paul De Grauwe 07 July 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Europe's nations and regions Global crisis Macroeconomic policy
ECB, monetary policy, euro, EMU, Spain, monetary union, fiscal policy, UK, government debt, austerity, EZ crisis, Outright Monetary Transactions, currency depreciation
Monetary policy without interest rates: Evidence from France (1948 to 1973) using a narrative approach
Eric Monnet 05 July 2014
The Global Crisis has raised the interest of banks in using quantitative controls, such as credit controls. This column discusses a relatively recent historical episode of credit controls in France. During this episode the role of interest rates was almost eliminated. Quantitative controls effectively decreased output and prices in the short-run. The difficulty for the Central Bank stemmed from the fact that it had to change its instruments constantly. This historical episode demonstrates that macroprudential tools can have substantial effects on monetary policy.
Recent central bank interventions following the Global Crisis have raised new interest in quantitative measures as instruments of monetary or macroprudential policy (Borio 2011, Galati and Moessner 2013). In fact, quantitative controls – especially credit controls – have been used as primary tools of monetary policy for decades in western Europe and east Asia, usually during periods when these countries were experiencing their highest ever rates of growth. Many countries, including Brazil, India, and China, still use them today.
Europe's nations and regions Monetary policy
France, monetary policy, credit controls
Low interest rates and secular stagnation: Is debt a missing link?
Claudio Borio, Piti Disyatat 25 June 2014
Real interest rates have fallen to historic lows, and some economists are concerned that an era of secular stagnation has begun. This column highlights the role of policy frameworks and financial factors – particularly debt – in linking low real interest rates and sluggish economic growth. Policies that do not lean against booms but ease aggressively and persistently in busts induce a downward bias in interest rates over time and an upward bias in debt levels – something akin to a debt trap. Low real interest rates may thus be self-reinforcing and not always ‘natural’.
Today, the US government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. With low interest rates dominating the developed world, many worry that an era of secular stagnation has begun (Summers 2013).
Financial markets Global crisis Monetary policy
interest rates, monetary policy, global crisis, debt, secular stagnation, risk-taking channel of monetary policy, natural rate of interest, monetary non-neutrality
Repairing the transmission of monetary policy through asset-backed securitisation
Markus K Brunnermeier, Yuliy Sannikov 03 June 2014
Eurozone monetary policy transmission is broken. A key aspect of this is the failure of credit to get to small and medium enterprises, and consumers. This column uses the ‘I theory of money’ to diagnosis the problem and propose ‘prudently designed’ asset-backed securitisation as the cure. This would transform illiquid SME and consumer loans into a liquid asset class that would broaden the transmission mechanism while providing a lasting intermediation market for this segment in the Eurozone.
Recent data show a decline in credit to small and medium-sized enterprise (SME) and private loans. Lack of credit growth to productive firms is one of the main obstacles to reignite the European growth engine.
monetary policy, price stability, financial stability, securitisation, risk premia, asset backed securities
ECB: An appropriate monetary policy
Mickey Levy 16 May 2014
As banks repay their loans from the Long-Term Refinancing Operation, the ECB’s balance sheet is shrinking. This column argues that, given the slow recovery and sustained low inflation, the ECB should replace its bank lending programme with quantitative easing. Buying short-term government debt would be consistent with the ECB’s inflation target, would keep the ECB’s monetary policy separate from its role in bank supervision, and would create a built-in exit strategy from unconventional policy.
Europe’s modest economic recovery and uncomfortably low inflation put the ECB in a bind. Although economic conditions are improving gradually (European Commission 2014), concerns about the potentially negative impacts of deflation persist (Armstrong et al. 2014). The ECB’s top near-term priorities are to avoid deflation (and apparently even sustained low inflation) and extend the economic recovery.
ECB, eurozone, monetary policy, quantitative easing, bank lending
Why monetary policy matters: New UK narrative evidence
James Cloyne, Patrick Hürtgen 15 May 2014
The effects of interest-rate changes on output and inflation could be much larger than previously thought. Such evidence was suggested by Romer and Romer in their analysis of the US. This column provides similar estimates for the UK based on a novel real-time dataset. In response to a 1% increase in the interest rate, output declines by 0.6% and inflation falls by one percentage point after two to three years.
In recent decades, central banks around the world have predominantly used interest rates as their main monetary policy instrument. And while the zero lower bound has necessitated a range of unconventional monetary policies, many central banks clearly still intend to use interest rates as their preferred tool as their economies recover. A range of empirical estimates have emerged from the academic literature over several decades putting the effect on prices and output of a one percentage point increase in interest rates between 0.5% and 1%.
monetary policy, UK, interest rates changes