Abstract
This chapter attempts to shed some light on the evolving nature of quantitative easing, or unconventional monetary policy in general. Confronted with the recent financial crisis, central banks in major economies moved swiftly and aggressively to counter the adverse effects of the malfunctioning financial system. In that process, central banks introduced various unconventional policy measures regarding the range of financial assets being purchased and in the scale of such purchases. As a result, central banks significantly expanded their balance sheets, especially so after the collapse of Lehman Brothers in September 2008. Thereafter, central banks continued to maintain expanded balance sheets by constantly reorganizing their policy strategy in accordance with changes in economic and financial conditions.
This chapter is an update of my previous paper (Shiratsuka 2010). I thank the participants of the 2010 EUSI conference and Toshiki Jinushi for their comments on the preliminary version of my paper. The views expressed in the paper are solely mine and do not necessarily reflect those of the Bank of Japan. Note that central banks, taken up in this chapter, took some additional policy measures after this chapter was finalized.
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Notes
- 1.
Following Shiratsuka (2010), I will use quantitative easing and unconventional monetary policy in an equivalent manner. He emphasizes that unconventional monetary policy in reality combines two elements of the central bank balance sheet, size and composition, to enhance overall policy effects, given the economic and financial circumstances and political constraints surrounding central banks.
- 2.
- 3.
Bernanke (2009a) first termed the Fed’s approach to “credit easing,” stressing a conceptual difference from the quantitative easing policy by the Bank of Japan (BOJ) from 2001 to 2006. Bernanke (2012) provides an overall review on the Fed’s policy responses under the recent financial crisis.
Under credit easing, the Fed established various types of credit and liquidity facilities as credit easing measures: Term Auction Facility (TAF) in Dec 2007; Primary Dealer Credit Facility (PDCF) in Mar 2008; Term Securities Lending Facility (TSLF) in Mar 2008; ABCP MMMF Liquidity Facility (AMLF) in Sep 2008; Commercial Paper Funding Facility (CPFF) in Oct 2008; Money Market Investor Funding Facility (MMIFF) in Nov 2008; and Term Asset-Backed Loan Facility (TALF) in Mar 2009. For further details, see the webpage for “credit and liquidity programs and the balance sheet” in the Fed’s website (http://www.federalreserve.gov/monetarypolicy/bst.htm).
- 4.
For further details of enhanced credit support, see, for example, Trichet (2009).
- 5.
A major innovation of the ECB was the introduction of a full-allotment liquidity provision operation with the significant extension of its maturity in the long-term refinancing operations (LTROs). The maturity of the LTROs was extended to three years in December 2011 as the intensified sovereign debt problem produced a severe stress on money markets in the euro area. See, for example, ECB (2010a, b, 2011).
The ECB also introduced two security purchase programs on an outright basis: the covered bond purchasing program (CBPP) in May 2009 and the Securities Markets Program (SMP) in May 2010. The second was intended to address the malfunctioning of sovereign bond markets, thereby restoring the monetary policy transmission channel. With that program, the ECB also absorbed the liquidity provided by bond purchases to keep the monetary policy unchanged.
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- 7.
Shirakawa (2009c, 2012b) summarizes the policy responses of the BOJ since the second half of 1990s and examine their lessons. For Japan’s experience of the financial crisis in 1997–1998, Saito and Shiratsuka (2001) examine the crisis from the viewpoint of the collapse of arbitrage in the financial markets due to the severe liquidity constraints of financial institutions. Regarding the zero interest rate policy from 1999 to 2000, Fujiki et al. (2001) review the conceptual basis for the policy framework. Ugai (2007) provides a comprehensive review of the empirical studies on the effects of the quantitative easing policy from 2001 to 2006.
- 8.
- 9.
This section is based on Shiratsuka (2010).
- 10.
Kuttner (2008), for example, viewed the recent Fed’s policy responses as a lender of last resort, and their effects and costs in detail. In addition, Tucker (2009) discussed three types of last resort operations in a financial crisis: lender of last resort, market maker of last resort, and capital of last resort. He pointed out that the first two operations are the role of a central bank, while the last is that of government.
- 11.
Bernanke (2009b) stresses the evolving nature of the important elements of the Fed’s balance sheet.
- 12.
Gagnon et al. (2011), for example, point out that the Fed’s large-scale asset purchase program results in significant and long-lasting reductions in premiums in a wide range of securities, including those not directly targeted by the program.
- 13.
Even under virtually zero nominal interest rates, a central bank can produce further easing effects by making a policy commitment to influence market expectations. This mechanism is called the “policy-duration effect,” seen in Fujiki et al. (2001) and Fujiki and Shiratsuka (2002). See, for example, Reifschneider and Williams (2000), Jung, Teranishi, and Watanabe (2005), and Eggertsson and Woodford (2003) for detailed discussions on the policy commitment effect when a central bank faces the zero lower bound of nominal interest rates. Okina and Shiratsuka (2004a) empirically examine the effects of policy commitment, and show that it was highly effective in stabilizing market expectations regarding the future path of short-term interest rates, thereby bringing longer-term interest rates down to flatten the yield curve. Ueda (2005) also reexamines his first-hand experiences as a board member from an academic viewpoint.
- 14.
Some central banks have employed a kind of policy commitment to make clear their policy intention to stabilize longer-term interest rates. For example, the Bank of Canada committed itself to maintaining its target overnight rate at 25 basis points for a certain period of time, based on their inflation projections. In a weaker form of policy commitment, the Fed used forward-looking language: “[The committee] continues to anticipate that economic conditions are likely to warrant an exceptionally low level of the federal funds rates for an extended period.”
- 15.
It should be noted that policy interest rates were maintained marginally above zero under the recent financial crisis, while policy interest rates were reduced to virtually zero in Japan during the ZIRP and the QEP. This is because many central banks adopted an interest payment scheme for excess reserves, thus coming to an understanding that it is unnecessary to guide the policy interest rates to around virtually zero to maintain a certain amount of excess reserves.
- 16.
Saito and Shiratsuka (2001) examine Japan’s experience in the late 1990s.
- 17.
- 18.
See Okina and Shiratsuka (2004b) for a further discussion on monetary policy and the structural implications when the asset price bubble burst.
- 19.
To overcome deflation, the BOJ is currently emphasizing the importance of efforts to strengthen the economy’s growth potential as well as support from the financial side. The BOJ is implementing two lines of policy measures: one is powerful monetary easing to encourage such efforts, with its virtually zero interest rate policy and the Asset Purchase Program, and the other is a Growth-Supporting Funding Facility. See, for example, Shirakawa (2012a). See also the BOJ website for a further explanation of recent policy actions (http://www.boj.or.jp/en/mopo/outline/sgp.htm).
- 20.
In addition, quantitative easing is likely to produce side effects, a consequence of the strong policy measures implemented to stabilize the financial system. A massive expansion of the central bank balance sheet is the corollary of public intervention in private financial transactions, potentially distorting incentives and resource allocation in the private sector. In particular, such side effects become more obvious as the duration of quantitative easing progresses.
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Shiratsuka, S. (2013). Evolution of Quantitative Easing. In: Kaji, S., Ogawa, E. (eds) Who Will Provide the Next Financial Model?. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54282-7_7
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