Quantifying the macroeconomic effects of large-scale asset purchases

Karl Walentin 11 September 2014

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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.

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Topics:  Global crisis Monetary policy

Tags:  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

The role of corporate saving in global rebalancing

Philippe Bacchetta, Kenza Benhima 24 August 2014

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The increase in global imbalances in the last decade posed a theoretical challenge for international macroeconomics. Why did some less-developed countries with a higher need for capital, like China, lend to richer countries? The inconsistency of standard open-economy dynamic models with actual global capital flows had already been stressed before (e.g. by Lucas 1990), but the sensitivity to this issue became more acute with increasing global imbalances. This stimulated the development of several alternative theoretical frameworks.

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Topics:  International finance International trade

Tags:  interest rates, global imbalances, capital flows, saving, global crisis, credit constraints, savings glut, zero lower bound, corporate saving, global rebalancing

Secular stagnation: Facts, causes, and cures – a new Vox eBook

Coen Teulings, Richard Baldwin 10 September 2014

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Teaser from original column posted on 15 August 2014

Six years after the Crisis and the recovery is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? This column introduces an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser, and a dozen others. It is too early to tell whether secular stagnation is really secular, but if it is, current policy tools will be obsolete. Policymakers should start thinking about potential solutions.

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Topics:  Global crisis Macroeconomic policy Monetary policy

Tags:  interest rates, US, Europe, Japan, investment, macroeconomics, Great Recession, zero lower bound, savings, secular stagnation, SecStag debate

Low interest rates and secular stagnation: Is debt a missing link?

Claudio Borio, Piti Disyatat 25 June 2014

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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).

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Topics:  Financial markets Global crisis Monetary policy

Tags:  interest rates, monetary policy, global crisis, debt, secular stagnation, risk-taking channel of monetary policy, natural rate of interest, monetary non-neutrality

The LIBOR scandal: What’s next ? A possible way forward

Vincent Brousseau, Alexandre Chailloux, Alain Durré 09 December 2013

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After the first allegations of LIBOR manipulation in May 2012 – which eventually resulted in investigations into banks and individuals in various countries as of June 2012 – the reliability and credibility of unsecured reference rates in various currencies (the LIBOR in pounds, dollars, euros, and yen, and also the EURIBOR) have been severely questioned. With a view to restoring the credibility of these important reference interest rates, financial regulators have launched a broad consultation to study possible options to avoid similar manipulation in the future.

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Topics:  Financial markets

Tags:  interest rates, LIBOR, financial regulation

To cut or not to cut, that is the (central banks') question: In search of neutral interest rates in Latin America

Nicolas Magud, Evridiki Tsounta 16 January 2013

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An increasing number of Latin American countries have been strengthening their monetary policy frameworks, using the monetary policy rate as their main instrument since the late 1990s. To decide whether to ease or tighten monetary conditions, policymakers typically compare the policy rate to the (short-run) neutral-interest rate – the rate that is consistent with stable inflation (at the central bank’s target) and a closed output gap. However, this rate can be time-varying as it is affected by changes in macroeconomic fundamentals and global interest rates.

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Topics:  Institutions and economics Macroeconomic policy Microeconomic regulation

Tags:  interest rates, Central Banks, Information

Banking union and ambiguity: Dare to go further

Sylvester Eijffinger, Rob Nijskens 23 November 2012

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On September 12, the European Commission published a proposal to establish a banking union in the Eurozone1. This proposal delegates the supervision of large cross-border banks to the ECB. The ECB will also be responsible for supervising smaller banks, in cooperation with national supervisors. The European Banking Authority (EBA) can coordinate this through the proposed Single Supervisory Mechanism.

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Topics:  EU institutions EU policies

Tags:  ECB, interest rates, banking union, supervision

Loose monetary policy and excessive credit and liquidity risk-taking by banks

Steven Ongena, José-Luis Peydró 25 October 2011

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A question under intense academic and policy debate since the start of the ongoing severe financial crisis is whether a low monetary-policy rate spurs excessive risk-taking by banks. From the start of the crisis in the summer of 2007, market commentators were quick to argue that, during the long period of very low interest rates from 2002 to 2005, banks had softened their lending standards and taken on excessive risk.

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Topics:  International finance Monetary policy

Tags:  interest rates, monetary policy, risk-taking, subprime loans

Monetary policy before the crisis

Stefan Gerlach, Laura Moretti 26 August 2011

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Many observers argue that excessively expansionary monetary policy led to the recent global financial crisis. Taylor (2007) claims, for example, that the Fed set the interest rates far below the correct rate (as suggested by the so-called Taylor rule).1 Excessively low interest rates reduced borrowing costs, inducing financial institutions to over leverage their balance sheets in pursuit of returns. This involved holding riskier assets, including the famous “toxic assets” (structured financial products), which offered high returns with solid credit ratings.

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Topics:  Global crisis Monetary policy

Tags:  interest rates, monetary policy, global crisis

On the contribution of monetary policy to economic fluctuations

Olivier Coibion 08 June 2011

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With fiscal policy locked in austerity and retrenchment programmes in many of the world’s advanced economies, monetary policy has become more important than ever. But how effective is it?

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Topics:  Monetary policy

Tags:  interest rates, inflation, monetary policy, Volcker experiment

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