The ECB s experience with unconventional measures. Vitor Constâncio. US Monetary Policy Forum, New York 25 February 2011.

Transcription

1 The ECB s experience with unconventional measures Vitor Constâncio Vice President US Monetary Policy Forum, New York 25 February 2011

2 Summary 1. Nature and size of the measures taken by central banks Liquidity provision and increased intermediation in the money market Quantitative easing Credit easing 2. Effects of measures 3. Future challenges Exit to normal implementation of monetary policy Continued regular use of unconventional measures? Risks of overstepping to fiscal and distribution policies? 2

3 1. Nature and size of the measures taken by central banks MEASURES ECB OTHERS 1. Liquidity provision and increased role of intermediation in the money market Fixed rate full allotment (FRFA) yes no Broadening of eligible collateral slightly yes Long term repo operations yes yes Inter central bank FX swap lines yes yes Modification of discount window facility no yes Broadening of counterparties no yes Securities lending, exchange with illiquid assets no yes 2. Quantitative easing Outright purchases of assets to change their prices (yields) no yes 3. Credit easing Credit and Purchase of assets of particular agents or market segments Yes (2 small programs) yes 4. Commitment to future path of (low) interest rates No Yes 3

4 Nature and size of the measures taken by central banks Total Assets (Dec 06=100) Monetary Base (Dec 06=100) BoE BoE FED ECB Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 FED ECB

5 1. Nature and size of the measures taken by central banks ECB s ASSETS ECB s LIABILITIES 2,000,000 2,000,000 1,800,000 1,800,000 1,600,000 1,600,000 Depo. facility 1,400,000 1,400,000 1,200,000 Current accounts 1,200,000 Long Term RO 1,000,000 Main RO 1,000, ,000 Banknotes 800, , , , , ,000 29/12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ /03/ /06/ /09/ /12/ , NFA 29/12/06 29/03/07 29/06/07 29/09/07 29/12/07 29/03/08 29/06/08 29/09/08 29/12/08 29/03/09 29/06/09 29/09/09 29/12/09 29/03/10 29/06/10 29/09/10 29/12/10 Net Foreign Assets Various domestic Covered bonds SMP MRO LongTRO FTO+MLF FED claims SNB claims Gov Deposits Other Autonomous Banknotes Current accounts Absorbing FTO Deposit Facility 5

6 Different measures, similar recovery ECB s measures were concentrated on liquidity provision and increased intermediation with two programs to improve the transmission of monetary policy (SMP) and repair the functioning of one market segment (Covered bonds). No quantitative easing was used. The increase in the total balance sheet and liquidity provision was smaller than in other cases. The lower bound of interest rates was not reached. Of course, fiscal policy and other measures also contributed to the recovery. 4 GDP Growth Rates Euro Area USA UK (F) 6

7 2. Effects of the measures To assess the impact of the measures the problem is to identify the counterfactual. So, a first line of analysis resorts to the event study methodology that tries to quantify the response of specific financial market variables to announcements and implementation of unconventional measures. Most recently, the impact of QE on bond yields was assessed in the UK by Joyce et al (2010) and in the US by Gagnon et al (2010) indicating very sizeable impacts on bond yields. A similar type of analysis has been applied to the ECB Covered Bonds Purchase Program by by Beirne et al (2011). An alternative to the event study method is the use of models to simulate the counterfactual. Using a Bayesian VAR framework for the euro area, Giannone et al (2010) show that the ECB s standard and non-standard measures combined ensured that the paths of money and credit to non-financial corporations were in line with pre-crisis empirical regularities, indicating that that an exceptional deleveraging was avoided by the policy measures. This conclusion on the effectiveness of unconventional measures is confirmed by the analysis of Fahr et al (2010) using both a VAR analysis and a DSGE model with financial frictions. 7

8 2. Effects of the measures Covered Bond spreads vis-à-vis public agencies yields (basis points) After the May 09 decision to start the covered bond purchase program of 60 bn, the effects on the spreads over the yields of bonds of public agencies is visibly very significant (In Beirne, J. et al (2011)) 8

9 2. Effects of the measures Souce: Fahr et al (2010) Fahr et al (2010) conclude that the ECB s non-standard measures played a nonnegligible role in supporting the expansionary impact of the interest rate reductions, as well as a role in helping preserve credit flows to the euro area economy. 9

10 3. Future challenges Exit to normal implementation of monetary policy Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 ECB Main Policy Rates and EONIA (in %, source: ECB) Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 EONIA Minimum Bid Rate (MRO) Marginal Lending Facility Rate Deposit Facility Rate May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 With full allotment the ECB could not control the market overnight rate and EONIA came down almost to the level of the deposit facility rate. An altenative way to steer EONIA would be to increase the deposit facility rate and reduce the «corridor» but that would not be market friendly as it would restrict money market activity with possible negative consequences for the future. The problem then is to regain control of the overnight market rate 10

11 3. Future Challenges 1. Exit to normal implementation of monetary policy In the modern framework of conducting monetary policy with remunerated reserves and a corridor defined by two standing facilities, it becomes operational the so-called decoupling principle or separation principle. This means that the signal of one particular announced policy rate can coexist with different levels of reserves, (i.e. is independent of that level) provided that the liquidity management operations ensure that the liquidity provided is not excessive or insufficient in relation to the demand by profit maximizing banks that react to the opportunity cost of reserves. This makes possible to steer the short-term market rate close to the policy rate. This implies that the use of the Balance Sheet for unconventional measures (either QE or C. Easing) to achieve objectives in markets other than the market for reserves can be made independent from the monetary policy stance. 11

12 3. Future Challenges 1. Exit to normal implementation of monetary policy Interventions under the headings of QE or CE don't have more power because they have bank reserves as counterpart on the liabilities side. The increase in reserves (or monetary base) is not per se inflationary as it does not lead necessarily to higher credit or M2/M3 expansion. As underlined by Borio and Disyatat (2009): In fact, the level of reserves hardly figures in banks lending decisions. The amount of credit outstanding is determined by banks willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. Nevertheless, to go back to normal implementation of monetary policy and be able to steer the short term money market rate close to the policy rate, there is the NEED TO ABSORB EXCESS LIQUIDITY and bring total reserves close to required reserves. 12

13 3. Future challenges Euro Area: Money (M3), Credit and Monetary Base Jan Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 M3 Credit to Private Sector Monetary Base US: Money, Credit and the Monetary Base Jul-10 Oct-10 Both charts illustrate the point that bank reserves don t lead necessarily to credit or monetary expansions. in spite of big increases in the Monetary base since 2008, there was no multiplier to Credit or Money Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 M2 Bank Credit to the Private Sector Monetary Base 13

14 3. Future challenges ECB - Excess Liquidity over required reserves (in %) 200% 150% 100% 50% 0% -50% -100% FED - Excess Reserves relative to required reserves (in %) 2500% 2000% 1500% 1000% 500% 0% Regarding the need to have again total reserves close to required reserves, the ECB is already in a situation where excess liquidity has been practically normalized. The fact that the provision was done mostly through repo operations also facilitates the exit 14 01/01/07 01/04/07 01/07/07 01/10/07 01/01/08 01/04/08 01/07/08 01/10/08 01/01/09 01/04/09 01/07/09 01/10/09 01/01/10 01/04/10 01/07/10 01/10/10 01/01/11 03/01/07 03/04/07 03/07/07 03/10/07 03/01/08 03/04/08 03/07/08 03/10/08 03/01/09 03/04/09 03/07/09 03/10/09 03/01/10 03/04/10 03/07/10 03/10/10 03/01/11

15 3. Future Challenges 2. Continued regular use of unconventional measures? The type of measures used belong typically to exceptional circumstances. Central banks are not changing their basic objective function and will not start targeting medium term yields or prices of other assets. Transmission channels are not sufficiently well known. Short term interest rates will continue to be the instrument of choice of monetary policy. Nevertheless the use of unconventional measures should become more symmetric in relation to boom and bust situations 3. Risks of overstepping into fiscal and distribution policies? Unconventional measures, like purchases of medium term assets or direct credit to non-financial firms, are not specific of central banks and can be seen as more akin to fiscal policy. More importantly though, such measures can distort relative prices and have distributional implications by benefiting particular economic agents. Central Banks in normal times should continue to operate only in the money market. 15

16 References Beirne, J. et al (2011): The impact of the Eurosystem s covered bond purchase programme on the primary and secondary markets, ECB Occasional Paper No Borio, C., P. Disyatat (2009): Unconventional monetary policies: an appraisal, BIS Working Paper No. 292 Cassola, N., A Durré and C. Holthausen (2010): Implementing Monetary Policy in the Crisis Times: the case of the ECB, available at Cheun, S., I von Köppern Mertes and B. Weller (2009): The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial turmoil, ECB Occasional Paper No European Central Bank (2010): The ECB s response to the financial crisis, ECB Monthly Bulletin, October. Fahr, S., R. Motto, M. Rostagno,, F. Smets and O.Tristani (2010): Lessons for monetary policy strategy from the recent past, available at Gagnon, J, M. Raskin, J. Remache, and B. Sack, B (2010): Large scale asset purchases by the Federal Reserve: did they work?, Federal Reserve Bank of New York, Staff Report No, 441. Giannone, D., M. Lenza,, H. Pill and L. Reichlin (2011): Non standard monetary policy measures and monetary developments, ECB Working Paper No Joyce, M., A. Lasaosa, I. Stevens and M. Tong (2010): The financial market impact of quantitative easing:, Bank of England Working Paper No Lenza, M., H. Pill and L. Reichlin (2010): Monetary policy in exceptional times, Economic Policy, April 2010 Neely, C.J. (2010): The large scale asset purchases had large international effects, Federal Reserve Bank of St. Louis Working Paper C. 16