Is the ECB doing QE?
Charles Wyplosz 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
The 4 September announcement by Chairman Mario Draghi has been greeted with enthusiasm by the markets and the media. It has been long awaited, and many believe that the ECB has finally delivered. This is not sure. The ECB intends to buy large amounts of securities backed by bank lending to households (mortgages) and to firms.
Exchange rates Financial markets Monetary policy
quantitative easing, QE, monetary policy, unconventional monetary policy, ECB, securitisation, bank lending, Europe, eurozone, Subprime, stress tests, deleveraging, recapitalisation, depreciation, exchange rates, euro, central banking
Quantifying the macroeconomic effects of large-scale asset purchases
Karl Walentin 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.
Global crisis Monetary policy
monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis
To exit the Great Recession, central banks must adapt their policies and models
Marcus Miller, Lei Zhang 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.
For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:
Global crisis Macroeconomic policy Monetary policy
Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy
What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis
Stephen Golub, Ayse Kaya, Michael Reay 08 September 2014
Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a ‘silo’ mentality reduced the impact of dissenting views.
Financial crises are caused by imprudent borrowing and lending, but as former Federal Reserve chairman William McChesney Martin noted, it is ultimately up to regulators to ‘take away the punch bowl’ when the larger economy is at risk. Indeed, many have criticised regulators for failing to anticipate and prevent the 2008 crash (Buiter 2012, Gorton 2012, Johnson and Kwak 2010, Roubini and Mihm 2010). Little work has been done, however, on why regulatory agencies failed to act despite warnings from prominent commentators (Borio and White 2004, Buffett 2003, Rajan 2005).
Financial markets Global crisis Monetary policy
financial crisis, Federal Reserve, FOMC, global crisis, collateralised debt obligations, Credit Default Swaps, LTCM, CDOs, CDSs, central banking
Lessons for rescuing a SIFI: The Banque de France’s 1889 ‘lifeboat’
Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene N. White 02 July 2014
The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.
In the aftermath of the 2008 financial crisis, the Dodd-Frank Act of 2010 set out to limit the authority of the Federal Reserve to rescue insolvent financial institutions. Since 1932, Section 13(3) of the Federal Reserve Act had given the agency the power to lend to “any individual partnership, or corporation” in “unusual and exigent circumstances.” The 2010 Act now compels the Fed to consult with the Secretary of the Treasury before implementing a new lending program.
Economic history Financial markets
Central Banks, financial crises, moral hazard, lender of last resort, bailout, bank runs, SIFIs, central banking, Banque de France
What future for central banking? Insights from the past
Stefano Ugolini 11 December 2011
While many central bankers feel they are now in unchartered territory, this column argues that history may provide guidance. Going back to a time before central banks, it argues that there are long-term cycles in the evolution of monetary policy – governments have alternatively internalised and externalised money creation. The key to success is not who runs monetary policy, but how credible they are.
For nearly three decades to 2007, the theory and practice of central banking have seen a remarkable convergence throughout the world. Yet the events of the recent years have marked a profound watershed. The pre-crisis consensus is now increasingly seen as inadequate, and changes to the central banker’s toolkit are being proposed (Eichengreen et al. 2011).
Global crisis Global governance Monetary policy
monetary policy, money supply, central banking
Rethinking central banking
Barry Eichengreen, Eswar Prasad, Raghuram Rajan 20 September 2011
Central banks have massively broadened their remit in recent crisis-laden years, but the standard analytic framework – ‘flexible inflation targeting’ – has not changed. This column argues that it is time to properly flesh out an alternative framework. Financial stability should be an explicit mandate of central banks, and international coordination among central banks should be boosted by forming a small group of systemically significant central banks that regularly meets and issues reports to the G20 on their financial-stability policies.
In the wake of the global financial crisis, there is an emerging consensus that the framework underpinning modern central banking – known as flexible inflation targeting – needs to be rethought.
financial stability, central banking, flexible inflation targeting