Roundheads versus Cavaliers: An Early Assessment of Quantitative Easing

Transcription

1 Roundheads versus Cavaliers: An Early Assessment of Quantitative Easing "...I wouldn t start from here if I were you..." Professor Jagjit S. Chadha University of Kent and Cambridge CIMF 13th May 2011 School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

2 A New Policy Tool Asset Purchase Facility borrows 200bn reserves at Bank Rate and uses them to buy bonds from the non-bank nancial sector at an average coupon of 5% Unsterilised open market operation with objective to get nominal GNP growth back to 5% or more: 1 Implemented to o set zero bound and planned to be withdrawn gradually; 2 Relaxes government s present value budget constraint; 3 Portfolio Balance e ect for non-bank nancial intermediaries; 4 Announcement e ects; 5 Bank lending. School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

3 Basic Policy Idea UK Policy Rate Percent 2.5 Nominal GDP Growth (YOY) Time Source: Reuters EcoWin School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

4 Output and Interest Rate E ects Reserves issuance pushes out LM curve and also CC curve as external nance premia are relaxed and demand shifts out School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

5 Announcement E ects I School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

6 Announcement E ects II School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

7 Monetary Analysis 200bn split between increase in reserves and creation of non-deposit liabilities (recapitalisation) School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

8 Government Liability Curve By announcement e ect - QE has attened the yield curve let s compare to the macro- nance yield curve School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

9 Macro-Finance Yield Curve The short rate is the sum of two latent factors; level and slope i t = δ 0 + L t + S t Monetary policy acts through a Taylor Rule. The yield curve factors are connected to π t and y t The level is the perceived in ation objective of the CB: L t = ρl t 1 + (1 ρ L ) π t + ε L,t The slope is set by CB to stabilise π t and y t : S t = g y y t + g π (π t L t ) + u S,t where u S,t = ρ u u S,t 1 + ε S,t School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

10 Estimating this problem Rudebusch and Wu (2008) Structural Model New Keynesian Structure drives macroeconomy π t = µ π L m t + (1 µ π ) (α π1 π t 1 + α π2 π t 2 ) + α y y t 1 + ε π,t y t = µ y E t y t µ y β y 1 y t 1 + β y 2 y t 2 β r i t 1 L m t 1 + εy,t Standard no-arbitrage formulation for the yield curve Λ t = λ 0 + λ 1 X t ; y t (n) = 1 n (a n + b 0 nx t ) School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

11 Diebold, Rudebusch and Aruoba (2006) Non-Structural Model y t (τ) = L t + S t 1 e τλ τλ + C 1 e τλ t τλ and 0 the L t, S 1 t and C t are time L t S t C t µ L µ S µ C A = α 11 α 12 α 13 α 21 α 22 α 23 α 31 α 32 α L t 1 µ L S t 1 µ S C t 1 µ C 1 A e τλ where lambda is xed 0 η t (L) η t (S) η t (C ) The state space system is then written in a vector/matrix notation as: (f t µ) = A (f t 1 µ) + η and y t = Λf t + ε t. Where where ft 0 = (L t, S t, C t, CU t, INFL t, FFR t ). This methodology allows for bidirectional feedback between the interest rates and the macroeconomy. School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21 1 A

12 Estimated Impact Oct to Feb Nominal October 1992 to February 2009 Level Slope Curvature Constant fiDD fi fiDD Trend? fiDD Inflation Exp fiDD Real Activity fiDD Unemployment? fiDD Financial Returns fi Libor fiDD IFO? fiDD German Ret. Sales? fi U.S. Non Farm Pay.? fiDD Feds Funds Rate fiDD BoE Policy Rate? fi Fiscal Policy fiDD Euro Effective ER fiDD Dollar Effective ER fiD UK Effective ER? fiDD? fiDD? fiDD? fiDD fi? fiD fiDD fiDD fiDD fi? fiD fiDD? fiDD? fiDD? fiDD fiDD? fiDD? fiDD fiD fiD? fiDD fiDD fiDD fiDD fi? fi? fiDD fi? fiDD? fiD? fi School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

13 Impulse Responses of Forwards School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

14 The Impact of QE on Forwards School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

15 Portfolio Balance Model Households Government Budget Constraint Fin. Intermediaries K maxe0 > K t dt t=0 c 2 1? 1 d 1? 1 a? nt 1+f + e?1 m 1+f?1 1?a m M t Pt 1? 1 am b! t + m m! m b t? m! t?1fi = Nqt? + 1+N b K 1 ^! t +? S b! K t?1? N K qt?1 R! t = EtR! L,t+1 + X b! t? b! L,t + a budget constraintw No government spending Accept deposits from Households supplylabour The government issues short term debt bt households at R A Recieve transfers from gov. and dividends and long term debt bl,t Earn profits on Rt and RL,t Sells debt to central banks and households Firms Interest Rates Market clearing K maxe0 > K t Pt ifiyt ifi? Wtnt ifi? ep Pt ifi 2 P t?1 ifi? 1 2 PtYt R A Returns to Households R! t A = 1 1+N t + N 1+N L,t+1 b! L,t =?qt + V! t t=0 Monopolistically competitive firms R! Short term nominal Supplyof bonds available profit maximisation is subject too aggregate prices RL,t Long term nominal EtR! L,t+1 = KEtV! t+1? V! t to households is taken and the productivityof labour D r! t Natural Real Rate r! D D t = _r! t?1 + P t up by financial Aggregate demand shock intermediaries Conventional MonetaryPolicy Unconventional MonetaryPolicy R! t = _RR! R t?1 + 1? _Rfi J^^! t + J xx! tfi + P t q qt = _qqt?1 + P t Monetarypolicyshock Asset purching shock Government purchases o set the household preference for short term bonds School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

16 Portfolio E ects and AD - Zero Bound School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

17 Bank Capital Model School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

18 Bank Capital and AD School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

19 Reserves and Banking Model Households Supply of Monitoring Work m CIA: Demand Deposits D = c + p V t t t Cash in Advance t Production φ log ct + U t = η 1 t = β y s ( 1 ) η t K t a t n t t t t (1 φ)log(1 m n ) = 0 + λt Budget Constraint a1: productivity shock Assumptions: Aggregate Demand Monopolistic Supply of Labour n competition Calvo pricing Aggregate Supply Demand for Labour n Banking Sector Monetary Policy ( ) ( ) IB Ls = ( + 3 ) α ( 2 ) 1 α t F bt a t qt a t mt R IB t = γ β1π t + β2mct + 1 γ Rt 1 a2 and a3: shocks to collateral q and monitoring work m gt Supply Loans (depends on q and m) Reserves: depend on penalty rate of a liquidity shortfall and on return on loans L + R = D t t t Fiscal Policy taxt = r r B + Pt A t ( 1+ Rt t 1 A ) Pt t 1 t + A B A Pt ( 1+ Rt ) Pt IB B EFP School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

20 Reserves and AD School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21

21 QE Next Steps Raw estimates suggest 100bp from announcement e ects and a similar amount from macro- nance yield curve Theoretical models nd limited role for portfolio balance e ect but signi cantly more when credit policy acts on bank capital or on bank liquidity - models do not have long and variable lags... Question of whether to purchase more illiquid/riskier assets Work on Exit Strategy from scal, low rates and QE Consider case for negative QE or bank capital taxes in a boom Basel III is about stocks but our models improve business cycle dynamics... School of Economics (KSE) National Bank of Serbia Seminar 13th May / 21