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Unconventional Monetary Policy in the USA and in Europe

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Abstract

Central banks reacted to the financial crisis through sets of unconventional monetary policies that encompass the use of market operations, forward guidance and negative interest rates. We discuss the phenomena that have characterized balance sheet-based policies in the USA and in the EU, and we relate the effects of these policies to the financial stability objective. Our interpretation of the available empirical evidence is that QE lowered long-term yields and eased credit conditions, but had only mild effects on macroeconomic fundamentals. Also, the recent tapering process might lead to potentially dangerous contingencies. Among them, we discuss the portfolio reallocation toward riskier stocks, the possibility of asset prices bubbles, a lower central bank independence and a reduced distance between monetary and fiscal policies.

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Notes

  1. 1.

    Federal Reserve, European Central Bank, Bank of England and Bank of Japan have all implemented some forms of balance sheet policies indeed (see Borio and Zabai 2016).

  2. 2.

    The second operation is also commonly labeled as Quantitative Easing (QE).

  3. 3.

    Here, financial structure is intended to indicate the intricate relationships between mortgage holders, financial institutions issuing mortgages, financial institution issuing securities backed by mortgages and all the buyers of such securities.

  4. 4.

    The cumulative effect is thereby at around −120.

  5. 5.

    This decreasing effect over time may also suggest that QE and asset purchases in general work better when the country implementing them is in distress and that they shall not be considered as a policy for normal times. This is also consistent with the interpretation that we offer for the EU asset purchases (see section “The Quantitative Easing in Europe: Country Heterogeneity ”).

  6. 6.

    The rationale behind the introduction of QE has to be found in a speech that the president of the ECB, Mario Draghi, delivered at the Netherland central bank in 2014.

  7. 7.

    The SMP is here not yet considered an unconventional monetary policy such as the QE. We consider it to be more similar to a lender of last resort operation. Furthermore, its size was limited to 60 Billions Euro, a relatively low amount with respect to the asset purchases programs implemented after 2015.

  8. 8.

    The ECB has since then acquired, every month, around 60 billions Euros of public bonds. Furthermore, this second phase has also been accompanied by some forms of forward guidance as several ECB directors publicly declared that the acquisition would stop as soon as inflation reaches the 2% target.

  9. 9.

    The acquisition of government bonds is called the Public Sector Purchase Programme (PSPP). The other subsections of the APP are the Covered Bonds Purchase Programme (CBPP) and the Corporate Sector Purchase Programme (CSPP). The latter two have been, respectively, implemented since March 2015 and June 2017.

  10. 10.

    See also https://www.ecb.europa.eu/mopo/implement/omt/html/pspp-qa.en.html.

  11. 11.

    Oddly enough, the unique country for which no effect is found is Greece, for which we also don’t have data in Fig. 1.

  12. 12.

    See https://www.ecb.europa.eu/ecb/orga/capital/html/index.en.html.

  13. 13.

    See, for example, the aggregate results and the answers of some of the participants to the CFM survey about the issue of central bank independence: http://cfmsurvey.org/surveys/future-central-bank-independence.

  14. 14.

    The work by Gambacorta et al. (2014) is however an ex-ante investigation on the QE. The work studies indeed the effects of a possible positive increase in the balance sheet of the central bank (without specifying which types of assets are bought) employing a VAR model.

  15. 15.

    See https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html.

  16. 16.

    See also http://www.fsb.org/wp-content/uploads/r_111027a.pdf.

  17. 17.

    See, e.g., Fisher (1933), Gurley and Shaw (1955), Minsky (1986), Bernanke and Gertler (1990), Borio and Drehmann (2009).

  18. 18.

    See the declaration on strengthening the financial system from the leaders of the G20: https://www.g20.org/profiles/g20/modules/custom/g20_beverly/img/timeline/ReinoUnido/G20-financialsystem-london-2009-en.pdf. Also, in the summit the Financial Stability Board was established as an expansion of the Financial Stability Forum, with a broadened mandate to promote financial stability, and with a strong institutional basis and enhanced capacity.

  19. 19.

    See https://www.federalreserve.gov/econres/fsprstaff.htm.

  20. 20.

    See https://www.federalreserve.gov/newsevents/speech/bernanke20090218a.htm.

  21. 21.

    See https://www.ecb.europa.eu/ecb/orga/escb/eurosystem-mission/html/index.en.html.

  22. 22.

    See sections “The Quantitative Easing in the USA: Financial Markets Segmentation ” and “The Quantitative Easing in Europe: Country Heterogeneity ”.

  23. 23.

    See https://www.ecb.europa.eu/press/pr/date/2018/html/ecb.mp181213.en.html.

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Authors and Affiliations

  1. Université Côte d’Azur – GREDEG, Valbonne, France

    Guerini Mattia

  2. OFCE – SciencesPo, Paris, France

    Guerini Mattia

  3. Sant’Anna School of Advanced Studies, Pisa, Italy

    Guerini Mattia & Lamperti Francesco

  4. European Institute of Economics and the Environment, Milan, Italy

    Lamperti Francesco

  5. University of Genova, Genova, Italy

    Mazzocchetti Andrea

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  1. Guerini Mattia
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  2. Lamperti Francesco
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Correspondence to Guerini Mattia .

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  1. Department of International and European Studies, University of Macedonia, Thessaloniki, Greece

    Vasileios Vlachos

  2. Department of International and European Studies, University of Macedonia, Thessaloniki, Greece

    Aristidis Bitzenis

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Mattia, G., Francesco, L., Andrea, M. (2019). Unconventional Monetary Policy in the USA and in Europe. In: Vlachos, V., Bitzenis, A. (eds) European Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-18103-1_3

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