Unconventional Monetary Policy

Abstract

This chapter introduces the reader to unconventional monetary policy, i.e. monetary policy using instruments going beyond the steering of short-term interest rates as described in the previous chapter. We start by providing the rationale of unconventional monetary policy, i.e. essentially pursuing an effective monetary policy when conventional policies are not able to provide the necessary monetary accommodation because of the zero lower bound. We then discuss negative interest rate policies, and explain why rates slightly below zero have proven to be feasible despite the existence of banknotes. We also discuss possible unintended side-effects of negative interest rates. We continue with a discussion of non-conventional credit operations: lengthening of their duration, the use of fixed-rate full allotment, the widening of the access of counterparties to the central bank’s credit operation, targeted operations, credit in foreign currency, and widening the collateral set. Finally, we turn to the purposes and effects of securities purchase programmes. We end the chapter by revisiting the classification of central bank instruments in three categories: conventional, unconventional, and lender of last resort.

This chapter introduces the reader to unconventional monetary policy, i.e. monetary policy using instruments going beyond the steering of short-term interest rates as described in the previous chapter. We start by providing the rationale of unconventional monetary policy, i.e. essentially pursuing an effective monetary policy when conventional policies are not able to provide the necessary monetary accommodation because of the zero lower bound. We then discuss negative interest rate policies, and explain why rates slightly below zero have proven to be feasible despite the existence of banknotes. We also discuss possible unintended side-effects of negative interest rates. We continue with a discussion of non-conventional credit operations: lengthening of their duration, the use of fixed-rate full allotment, the widening of the access of counterparties to the central bank’s credit operation, targeted operations, credit in foreign currency, and widening the collateral set. Finally, we turn to the purposes and effects of securities purchase programmes. We end the chapter by revisiting the classification of central bank instruments in three categories: conventional, unconventional, and lender of last resort.

4.1 Rationale and Definition of “Unconventional” Monetary Policy

Chapter 3 introduced the basic Wicksellian logic, according to which there is a “neutral” or “non-accelerating” short-term risk-free interest rate i*, such that if i_t > i_t* ⇒ π_t ↓; If i_t < i_t* ⇒ π_t↑ or, in words, if the actual short-term risk-free rate is below the neutral level, inflation will increase, while in the opposite case inflation will decrease. In the most basic version, the neutral rate is simply the sum of the expected real rate and the expected inflation rate, i.e. i_t* = E(r_t) + E(π_t). If however the key issue is the funding costs of the real economy, and not just an abstract risk free interest rate, then it is more correct to define the neutral interest rate as: i_t* = E(r_t) + E(π_t) – τ – λ, with τ being a measure of the term spread and λ being a measure of the liquidity and credit risk spreads between the average short-term funding costs of the real economy and the short-term risk-free interest rate. The latter will increase in a financial crisis beyond normal levels and needs to be addressed through an additional easing of monetary policy.

In a financial crisis, with the associated economic slowdown, and starting from the low structural growth as prevailing in Japan or Europe, expected growth will easily be zero or negative, also implying low or negative real interest rates. If in addition, credit and liquidity spreads increase by 100 or 200 basis points relative to normal levels, as happened in 2008, and expected inflation is also close to zero, then the neutral interest rate i_t* will be negative, meaning that an inflationary impulse will require either negative nominal interest rates, or the combination of zero/negative interest rates with “non-conventional” measures that will exert downward pressure on τ and λ. Downward pressure on τ can be achieved through forward guidance¹ (committing to hold rates low for long) and through outright purchase programs of long term fixed rate securities to compress term spreads. Downward pressure on λ can be achieved through so-called credit-easing measures, including purchases of less liquid and more credit risky securities, and strengthening the lender of last resort (LOLR) support to the banking system such as to reduce perceived funding liquidity risks of banks. In this chapter, such non-conventional monetary policies will be discussed, whereby policies relating to the LOLR will be dealt with in Chapter 7.

Non-conventional monetary policy measures are typically considered to have some potentially negative side effects, while short-term interest rate policies in positive territory do not. For this reason, non-conventional measures are used only if unavoidable, i.e. when i_t* < 0, i.e. when short-term interest rate policies alone are no longer sufficient. Negative side effects are likely to increase with the intensity of measures, such that combining different measures may often be optimal to achieve the adequate overall stance of monetary policy. We can think of each non-conventional measure as having (i) a fixed set up /transition cost (need to analyse, specify, decide, communicate new measure); and (ii) an increasing marginal cost from “distortions” it creates.

It appears that central banks have assessed the relative costs of the different unconditional measures differently: for example, the Fed and the Bank of England have not hesitated to conduct large scale asset purchase programs as of 2009 but have not tried negative interest rates. In contrast, the ECB has taken a while before launching a true “quantitative easing” asset purchase program, but did not hesitate to move interest rates into negative territory. Of course, the perceived negative side effects of non-conventional measures always depend on circumstances, i.e. may be different from one jurisdiction to another, or from one episode to another.

The reasoning above assumes that the choice and specification of non-standard measures can basically be mapped into a single number: the additional accommodation needed beyond the zero lower bound. However, one may question this, and instead see non-trivial issues in the interaction of non-standard measures that imply that one cannot just add up the accommodation that each measure brings.

4.2 Negative Interest Rate Policy (NIRP)

Four European central banks have applied NIRP in recent years, namely those of Denmark, Switzerland, Sweden and the euro area (for a survey of the implementation of NIRP by these central banks, see e.g. Bech and Malkhozov (2016). In addition, the Bank of Japan introduced NIRP in early 2016. In principle, the rationale for applying negative rates under some circumstances is obvious from the Wicksellian logic above. It could be argued that in 2008, the policy-adequate short-term interest rate would have been as low as between −3 to −5%, i.e. if central banks had been able to implement negative rates at these levels, the crisis would have been more short-lived (avoiding the large scale economic contraction and associated welfare damage) and further non-conventional monetary policies (such as large scale asset purchase programs) with their complexities and side effects would not have been needed. Strong supporters of negative interest rates as an obvious policy tool are for instance Buiter (2009) and Rogoff (2017), who also discuss how to make negative rates possible.

4.2.1 Reasons for a Lower Bound

4.2.1.1 Lower Bound Created by the Zero Remuneration of Banknotes

Deeply negative interest rates should eventually lead to an explosion of the demand for banknotes, as banknotes have a zero remuneration. Indeed, it could be argued that all economic agents (banks, investors, households) can escape negative interest rates by substituting negatively remunerated financial assets with banknotes (which have zero remuneration). This is a powerful and obvious argument against deeply negative interest rates, and the only solution to it would be to discontinue the existence of physical banknotes, e.g. by fully replacing them with central bank digital currency, which could be remunerated negatively when needed. However, critics argue that this would create a tool for central banks to expropriate savers (by imposing negative interest rates, see e.g. Bindseil et al. (2015) and that discontinuing banknotes would also destroy, a la George Orwell’s “1984”, the freedom provided by anonymous payments. In addition, banknotes are resilient to cyber-attacks and power outages and they score high in terms of financial inclusion, as they do not require even a mobile phone. These arguments prevail for the time being in most countries, and therefore banknotes will continue to limit the scope for negative interest rates to the levels reached over the last few years, i.e. not lower than around −100 basis points. This seems to be the level at which banknote demand could start to have substantial momentum and undermine the effectiveness of negative interest rates. As in the case of a central bank digital currency undermining household deposits with banks seen in section 2.8, a ballooning of central bank money holdings of households would imply that banks would lose large amounts of deposits and become more and more dependent on central bank credit. This would deplete collateral buffers and could put banks under liquidity stress, making it unlikely that bank lending rates will decline, i.e. undermining the effectiveness of NIRP. Banks may not want to pass on negative rates to household deposits to avoid triggering such a run on deposits. However, then, banks’ profitability suffers, as discussed further under point 2 below. In principle, the banknote hoarding argument also applies, for example, to banks, who could, in an environment of excess reserves, such as prevailing typically in the negative interest rate countries, start to hoard cash.

In the financial accounts in Table 4.1, we assume that both households and banks started to hoard cash as a consequence of negative interest rate policies. Efficient arbitrage would allow asset holders to fully escape from negative asset remuneration, fully undermining the transmission of negative central bank rates to asset yields. These financial accounts also show the case when the cash hoarding goes so far as to switch back (despite the QE program captured by S) the banks’ excess reserves into a liquidity deficit, implying growing needs of central bank credit, eventually creating potential liquidity stress on banks.

Table 4.1 Banknotes hording under negative interest rate policies of the central bank

4.2.1.2 Lower Bound Due to Negative Effects on Profitability of Banks

It has been argued that negative rates undermine bank profitability and undermine the transmission of negative rates as banks would be unable to pass on negative rates to retail depositors—see e.g. Bech, and Malkhozov (2016, 39–40), or Brunnermeier and Koby (2019)

Most central banks applying NIRP have acknowledged the particular effects of negatively remunerated excess reserves combined with an unwillingness/inability of banks to pass on negative rates to retail deposits through an innovation in their operational framework: so-called excess reserves tiering systems which exempt a part of the excess reserves from the application of negative interest rates. The idea is that a tiering system would allow the combination of (i) negative rates still effective at the margin and therefore passed on to money and capital markets, and (ii) the exemption of parts of the excess reserves moderating negative effects on bank profitability that could weaken the effectiveness of NIRP. By disconnecting the two, the transmission of NIRP to bank lending rates could be improved, and the “effective” lower bound, at which further rate cuts are no longer effective in terms of reducing bank lending rates, could be lowered. Still, reserve tiering does not fully eliminate the effects of negative interest rates on bank profitability. One source of bank profitability is the spread between interest rates on sight deposits of banks and interest rates on loans to non-banks, which are of longer duration. As the former turned out to be far less sensitive to NIRP than the latter, the spread between the two declined. Actually this effect is however not specific to NIRP, but also occurs to some extent with low (positive) interest rate policies.

4.2.2 Criticism of the Negative Interest Rate Policy

4.2.2.1 Financial Market Functioning Under Negative Interest Rates

Before the introduction of negative rates, there were some fears over whether money and other key financial markets can function at all with negative interest rates. As also noted by Bech and Malkhozov (2016, 37), steering short term interest rates into negative territory has not been particularly challenging, nor did financial markets change their behaviour in negative territory. One may add that the combination of NIRP and asset purchase programmes also pushed longer term bond yields into negative territory, e.g. for Switzerland, Japan and Germany for the entire risk-free yield curve, even beyond 10 years. Again, there was no indication of negative effects on market functioning.

4.2.2.2 General Counterproductive Effects of Low/Negative Interest Rates

Finally, a number of critical authors have argued that central banks’ low (and by implication, also negative) interest rate policies are ineffective or, at the very least, have major negative side effects that central banks tend to underestimate. These authors also seem to suggest that acknowledging the problem of low interest rate policies could lead to the conclusion that central banks should increase nominal interest rates without delay. The main arguments are as follows.

• Low interest rates would weaken the life-time income prospects of savers, and therefore lead to more saving and less consumption, and this would be negative for aggregate demand.

• Low interest rates would create bubbles and therefore contribute to creating the next crisis and undermining the efficiency of resource allocation.

• Low interest rates and elastic central bank liquidity supply weaken hard budget constraints because of their supportive effect to funding market access for indebted companies, households and the state. They therefore would lead to zombification and low growth, creating a vicious circle.

Bindseil et al. (2015) and others discuss and refute these arguments. The European Systemic Risk Board (2016) and the BIS (2018) have prepared extensive studies on macroprudential issues related to low interest rates. Overall, it seems that problems arise if economic agents deny the new reality of low real and nominal interest rates, and therefore either continue making unsustainable return promises to investors, or try, through unsound risk taking, to generate returns that are unrealistic. Also, if agents did not see the low interest rate environment coming and therefore took positions (or run a business model) that in the low interest rate scenario undermine their solvency, a transition issue arises that needs to be addressed in a way that minimises damage for society while keeping in mind moral hazard issues.

In sum: negative interest rates may be viewed as an obvious continuation of Wicksellian interest rate policies when the neutral level of interest rates falls into negative territory, as has become more likely in an environment with low growth potential and high central bank credibility as inflation fighters. In this sense, NIRP could be classified as a conventional monetary policy approach, reducing the need for non-conventional policy measures in the narrow sense with their possible more problematic side effects (such as large-scale asset purchase programmes). That NIRP is effective has been demonstrated by its strong effects on both capital market rates and bank lending rates. At the same time, two lower bound problems have to be acknowledged, namely (i) the one where banknote demand would explode; (ii) the one in which bank profitability would be undermined in such a way that a further lowering of central bank interest rates no longer leads to decreases in bank lending rates, as partially observed in Switzerland. While the former is also determined by storage and insurance costs of banknotes, the latter also depends on the willingness and ability of banks to pass on negative rates to different types of depositors and the amount of excess reserves that banks hold with the central bank at negative interest rates. While the two lower bounds are partially linked (through the decision of banks on whether to pass on negative rates to depositors), they are not necessarily the same. Both lower bounds could be overcome through a discontinuation of banknotes and their full replacement by CBDC—which however is not considered for a number of reasons as banknotes still have specific advantages.

4.3 Non-Conventional Credit Operations

Central banks have taken a variety of measures during the crisis to make their open market operations more supportive. Some of these measures relate to the lender-of-last-resort (LOLR) function, but even those are relevant from the monetary policy perspective. If the zero-lower bound is binding, strengthening the LOLR implies a reduction of funding stress to banks, which reduces pressure on them to deleverage or to increase the role of expensive funding sources. The LOLR therefore contributes to maintain the readiness of banks to provide credit to the economy at a moderate mark up to short-term risk-free rates.

First, central banks have lengthened the duration of their lending operations to banks, with the ECB going as far as four-year credit operations. Banks may consider a sequence of short-term borrowings from the central bank as inferior, from a liquidity risk perspective, to one longer-term borrowing operation. Consider three reasons for this: (i) Banks could perceive as uncertain the conditions under which central banks will provide short-term funding in the future (rates, access conditions, etc.). (ii) Even if the central bank commits to keep conditions for short-term access stable, e.g. it commits to full allotment at a given rate for its short-term operations for the next twelve months, banks may, as a matter of principle, find revolving short-term central bank refinancing less certain than twelve-month refinancing. (iii) Banks may be subject to some liquidity regulation, which treats longer-term refinancing from the central bank more favourably.

Second, central banks have replaced auction procedures to allocate central bank credit with ‘fixed rate full allotment’ (FRFA) operations. The ECB has done so in October 2008 and ever since then has applied this simpler allotment procedure, which has the following advantages.

• It is more automatic and simpler than variable-rate tenders. This is per se a positive feature, as automatism means simplicity and transparency and hence fewer potential mistakes by the central bank and the commercial banks.

• In a liquidity crisis, the reduction of banks’ uncertainty about the results of the tender assuages liquidity risk.

• It makes it possible to avoid aggressive bidding via high rates as it may take place with variable-rate tenders, thereby avoiding high and volatile marginal interest rates, which could imply unintended signals.

• The central bank no longer needs to estimate which allotment amount would ensure that market rates remain close to target rates. Carrying out fixed-rate full allotment tenders is almost equivalent to setting the standing facility rate at the level of the target rate, with the only difference that an open market operation is not continuously open.

Third, central banks have widened the access of counterparties to their credit operations. When interbank markets break down, then financial institutions without recourse to central bank credit are in trouble, as they can no longer manage their day-to-day funding needs through credit operations with banks and capital market access. Allowing direct central bank access makes them independent from the functioning of interbank and capital markets.

Fourth, central banks have introduced “targeted” credit operations which make favourable lending terms (or access in general) conditional on some desirable behaviour of banks, such as providing more lending to the real economy. The ECB has done this through its so-called TLTRO operations, the Bank of Japan through its “Loan support programme” (LSP) and the Bank of England through its “Funding for lending scheme” (FLS).

Fifth, central banks have started to provide credit in foreign currency, notably in USD. The ECB and the Bank of Japan have done so since the end of 2007, based on swap lines established between central banks (see e.g. Goldberg et al. 2010). If USD spot and swap markets are impaired, this ensures that banks have sufficient USD funding to meet their obligations in USD (see Sheets et al. 2018).

Finally, widening the central bank collateral set applicable to credit operations is both a monetary policy and a LOLR measure, and will be discussed in more detail in Chapter 6. However, as Bindseil (2013) argues, it is also an unconventional monetary policy measure as it supports the ability of banks to continue providing credit and lowers the intermediation spread between short-term risk-free rates and bank lending rates. At the ZLB, compressing this spread or at least counteracting its increase can be decisive in preventing the economy from gliding into a deflationary trap.

4.4 Outright Purchase Programmes

All major central banks at some stage of the crisis that started in August 2007 established outright purchase programs for financial assets. The following eight objectives of such measures can be identified. The effects (3), (4), (6) and (7) can also be partially achieved through credit operations, but as credit operations are temporary, they may give less confidence to banks that the measure and the effects will be permanent.

(1) Reducing long-term risk-free interest rates

The transmission of monetary policy takes place via longer term rates, as most economic decisions (e.g. building a house or a new factory) depend on longer term rates. Longer term rates can be decomposed into an average of expected short term rates, plus a term premium (according to the expectations hypothesis of the term structure of interest rates). If the zero lower bound constrains reductions in short-term interest rates, then the central bank may want to provide further accommodation by at least reducing term premia through purchases of long-term bonds. This argument has been key to the Fed and the Bank of England programs that started in 2009.

(2) Compress credit and liquidity spreads (“market maker of last resort”)

In a financial crisis, risky assets’ prices may be depressed due to asset fire sales and the absence of opportunistic buyers (i.e. buyers who buy whenever they feel an asset has become cheap). Moreover, arbitrage between asset classes may no longer work because of high bid-ask spreads, liquidity and capital constraints, systemic uncertainty, and self-fulfilling fears. In such an environment, the central bank can through purchases support depressed assets prices directly ease funding costs and constraints. Of course, central banks should not lower spreads below an adequate risk premium. Assessing what is an appropriate spread is of course challenging, in particular during a crisis.

(3) Inject excess reserves to strengthen banks’ liquidity buffers

Large scale outright purchase programmes push the banking system into a liquidity surplus position towards the central bank. This facilitates central bank liquidity management and the control of the overnight rate (which will be close to the deposit facility rate, or to the rate of remuneration of excess reserves). More importantly, a situation of general excess reserves may support financial stability as most banks will feel re-assured in their short-term liquidity position.

(4) Inject excess reserves to increase the money supply via the money multiplier

Excess reserves targets play a role in the “money supply” approach to monetary policy implementation, as promoted in the official communication of the Bank of Japan between 2001 and 2016. This approach seems to be in line with traditional monetarist thinking.

(5) Absorbing risks from banks’ into the central bank balance sheet and easing capital constraints of banks

The central bank may reduce total risk in banks’ balance sheets by buying risky assets from them. Therefore, if banks feel constrained in terms of economic or regulatory capital, outright purchases by central banks may attenuate these constrains and thereby support their lending behaviour and thereby ease monetary conditions. Taking credit risk into the central bank balance sheet, e.g. in the form of purchases of a corporate bond portfolios, implies the need for the central bank to develop relevant expertise on credit risk management for this asset class. Moreover, in case of debt restructurings, the central bank will have to vote in bond holder assemblies, i.e., contribute to decisions which are remote to its core functions, and which entail reputational risks.

(6) Substituting banks’ illiquid with liquid assets to improve overall liquidity of banks

Purchasing illiquid assets outright improves liquidity of banks, particularly if these assets were previously not eligible as central bank collateral, or only at a high haircut.

(7) Directly supporting through primary market purchases the funding liquidity of banks and/or other firms

By purchasing in the primary market bonds from issuers (unsecured bank bonds, covered bank bonds, corporate bonds, etc.), the central bank supports directly the funding of these institutions. Central bank purchases of debt of non-financial corporates (NFC), if done in the primary market, directly refinance the real sector and thus can offset the unwillingness of banks to provide their usual lending and liquidity services.

(8) Threat to “purchase all real assets in the world” to counter perception of deflationary trap

Central banks are in principle able to purchase all assets of the world with the money that they can issue without constraints—in particular in a deflationary context. When central banks launch such potentially infinite purchase programs, the other economic agents will become less willing to sell all their assets (including equity, commodities, etc.), and they will thus require higher and higher prices, and hence the purchasing power of the currency will fall. In the case of a credible central bank, this will be anticipated, and the announcement of such a purchase program should immediately defeat deflation.

Impact of purchase programmes on yield levels

There is a growing empirical literature estimating the effects of large-scale asset purchase programmes on the risk-free yield curve and its further transmission to other interest rates and the real economy (a comprehensive recent study covering the programmes of the US, UK, Japan and the euro area is Agostini et al. 2016). Effects on long-term interest rates of recent large-scale asset purchase programmes are generally believed to be in the area of up to 100 basis points. In combination with NIRP, this would mean that these two policies together could achieve reductions of long-term funding rates of up to 200 basis points, which obviously means substantial further easing (NIRP also contributes to reduce long-term rates as expectations on future short-term interest rates decrease). When looking more precisely at the effects of purchase programmes on asset prices and long-term yields, it is important to distinguish between the following three effects (D’Amico and King 2011 were the first to investigate theoretical and empirical aspects of flow vs stock effects of the US Fed’s asset purchase programmes):

• Stock effect: if there are static demand and supply elasticities for different types of securities (based on investors’ static preferred habitats), then one would expect that the eventual stock of securities purchased in a programme will determine the price impact.

• Flow effect: if the price of an asset is driven essentially by the daily demand and supply conditions and if agents’ ability to bridge prices across time through intertemporal arbitrage is limited, then the daily flows of purchases and sales would matter. The strength of flow effects of an asset purchase program will therefore depend on (i) the pace of purchases (purchased volume per unit of time); (ii) the efficiency and flexibility of market makers and investors to do intertemporal arbitrage and warehouse positions accordingly; (iii) the speed at which investors are able or willing to adjust their stocks, which also depends on who in particular holds the assets (a pension fund vs a bank in its trading book); (iv) the time between the announcement of the programme and its start (more time allows investors to prepare for selling assets and dealers to accumulate stocks waiting for the central bank).

• Announcement effect: if asset prices in principle reflect at any moment in time all available information, it can be expected that most of the impact on prices and yields materialises immediately when the central bank announces an asset purchase program. The announcement effect should be an anticipation of the stock effect, and not of the flow effect. The announcement effect will mainly depend on (i) the degree to which the announcement has not been anticipated (for example, when the ECB’s PSPP was announced, markets hardly moved as it had been anticipated); (ii) the credibility of the central bank (determined, for example, by its history of meticulously implementing what it promises); (iii) how remote in the future the promised measures are (with non-perfect central bank credibility, more remote measures will have a lesser announcement effect than measures which are relatively nearby), (iv) the clarity of the announcement.

Central bank purchases with too short lead times (after the program’s announcement) and at a too high pace distorts markets, in the sense of letting yields temporarily undershoot more than necessary. It also implies that the central bank will over-pay. Buying with too long lead times and with a too low pace unnecessarily delays the desired easing of financial conditions. Interestingly, in the case of limited central bank credibility, stronger flow effects may be desirable as they contribute to a quick price adjustment, i.e. a faster effectiveness of monetary easing, without this implying that the central bank purchases at excessive prices. A less credible central bank should therefore buy at a higher pace and start faster than a credible central bank, which can immediately achieve stock effects.

4.5 Distinguishing Between Conventional, Non-Conventional, and LOLR Policies

Central banks have, despite the presumption that non-conventional measures have negative side effects and conventional measures have not, maintained non-standard measures beyond what is strictly implied by the existence of the ZLB: For example, the Fed’s policy normalisation has consisted first in withdrawing accommodation through a number of standard interest rate increases, before reducing its stock of LSAP-securities. This was explained to be preferable because rate hikes would be easier to dose than the impact of changes of securities stocks on the stance of monetary policy. Moreover, it would be easier to switch direction by changes of interest rates than in terms of changes to a securities stock. Also, in 2007 and 2008 central banks undertook various non-standard measures without having yet reached the zero lower bound. Those may have related to LOLR measures, which may be beneficial for society regardless of having reached the ZLB or not (because the LOLR may save viable and solvent, but temporarily illiquid projects).

While the LOLR will only be discussed in Chapter 6, it is interesting here to try to put order into the three types of policy objectives determining the specification of central bank market operations. The following chart puts the LOLR into context with conventional and non-conventional monetary policies and assigns central bank financial operations and instruments to any of the three (overlapping) areas (Fig. 4.1).

Fig. 4.1

Instruments and types of central bank policies

• Control of short-term interest rates is the classical form of conventional monetary policy.

• NIRP (negative interest rate policy) can be classified as “conventional” monetary policy, as it is in some way just a continuation of central bank short-term interest rate policies. Still, it has something unconventional, as it had never been done before 2013.

• TLTRO (targeted longer-term refinancing operations) and QE (“quantitative easing”) types of asset purchase programs are pure non-conventional monetary policy operations.

• Credit easing asset purchase programs are unconventional monetary policy measures but can also have LOLR content, if the program aims (also) at improving the funding liquidity of the firms issuing the debt purchased.

• FRFA (Fixed rate full allotment) credit operations attenuate funding fears of banks, and in this sense are a LOLR measure. At the same time, they support the willingness of banks to provide credit to the real economy, which at the zero-lower bound adds policy accommodation.

• ELA (Emergency liquidity assistance) is by definition outside monetary policy. At the same time, ELA may prevent contagion of a narrow liquidity issue to the rest of the financial system, which would have repercussions for monetary policy transmission. In this sense, ELA decisions may often be non-neutral for monetary policy.

• Collateral is the one and only element in the intersection of the three circles: it is necessary to conventional monetary policy credit operations, and in exceptional circumstances (liquidity crises and/or zero-lower bound problem), broadening the collateral set supports funding liquidity of banks, which attenuates the crisis and supports bank lending.