Focus on unconventional monetary policies

 

The so-called unconventional monetary policies (UMPs) implemented since 2010 by the top Central Banks are unconventional to the extent to which they are unprecedented. Nevertheless, they simply relySource on alternative monetary transmission channels once the traditional lending channel (through policy rates setting) gets disrupted. There are mainly three categories of UMPs:

• Credit easing which refers to less stringent requirements on the quality and liquidity of commercial banks’ collateral accepted by central banks as part of their procedures for lending facilities.

• Quantitative easing (QE) which refers to asset purchases, whatever their being public or private securities. The rationale of this intervention relies on the portfolio rebalancing channel which is supposed urging investors to shift towards riskier investments as yields of the range of assets purchased by central banks decline.

• Forward guidance which consists in further communication on the duration and level of interest rates set by central banks so as to anchor expectations and relieve financial markets’ uncertainty.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: FED and BoE

 

Several risks are associated with QE, not so much those associated with inflationary pressures but rather those dealing with financial bubbles. This concern is strongly related to warning signals exposed by the IMF in the last global financial stability report about rising financial risk-taking as opposed to economic risk-taking. QE could introduce further distorsions in the macroeconomic sphere, failing to kick-start real growth potential.

 

As regards to CE, it seems to be have led to mixed results in the euro area. The provision of almost unlimited liquidities at preferential rates to commercial banks through the ECB’ LTRO then TLTRO auctions did not repair the lending channel. Nonetheless, it fastened the deleveraging process of European banks which could facilitate economic recovery as part of a second-round effect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bruegel Institute

 

However, the lending channel is deeply fragmented and heterogeneous within the euro area. One cannot expect a wide and even effect of such an intervention on the part of the ECB across member states.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Focus on QE in the euro area

 

Focusing more specifically on ECB’ QE program launched in March, 2015, what can be the implications of a monthly 60 bn € purchase on the real economy? It is difficult to draw any hasty conclusions from the US example insofar as the financial structure differs tremendously. The euro area is first and foremost a bank-based system that provides for intermediated loans contrary to the US. Therefore the transmission mechanisms might diverge for one region to another. The macroeconomic setting is different as well, the euro area being stuck into a deflationary risk that is further exacerbated by the decline of oil prices.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                                          Soures: Krugman, ECB and Bruegel Institute

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Up to now, ECB’s interventions were successful in compressing government bond yields and sovereign credit default swaps. But little results are visible as regards to the re-anchoring of inflation expectations. That is the main objective of the ECB’s full-blown QE program that sidelined risk-sharing (therefore profit-sharing) and opted for national central banks’ responsibility in the implementation of asset purchases.

 

 

Focus on financial vs. business cycles

 

The difficulty that weights upon central banks’ UMPs stems from the decoupling of business and financial cycles, the latter being much more volatile. Macro-prudential authorities need to look at different leading indicators and pools of variables to position themselves in the leaning-against-the-wind debate and choose the appropriate sequence as well as scope of their policy instruments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: ECB, Financial Stability Report (November, 2014)