The Central Bank Balance Sheet as a Policy Tool: Past, Present and Future

Abstract

This paper focuses on what has been learned from the past decade of previously unconventional monetary policy measures and the emerging lessons from the effects of monetary policy responses to the Covid shock. The paper explores two observations from recent quantitative easing (QE) policies in detail. First, large QE programmes implemented quickly may be particularly effective in times of market dysfunction. Second, a rapid pace of asset purchases may also enhance QE effectiveness during these periods. These observations suggest a particular form of 'state contingency' for the impact of QE. The paper analyses the potential implications of such state contingency for the appropriate conduct of QE policies and the choice of policy instruments in more normal times. The paper also outlines some potential implications for future central bank balance sheet policies and the operational framework to support them.

When Domestic and Foreign QE Overlap: Evidence from Sweden

“…The current wave of unconventional 30 monetary policy has been initially aimed at alleviating financial market distress. As argued by Bailey et al (2020), in periods of financial market distress, large asset purchases programmes implemented quickly may be even more effective than in normal times.…”

The monetary policy strategy of the Bank of England in 2020–21: An assessment

“…Why was the Bank of England's contribution to M4x so large? A benign interpretation would be that the Bank's motive in conducting the large‐scale asset purchases in 2020–21 was to overcome “market dysfunction and illiquidity” (Bailey, 2020, p. 4). Unfortunately, the Bank ignored the monetary consequences.…”

The Fiscal Impact of Quantitative Easing

“…These large-scale securities purchases are transmitted to aggregate demand through various channels (Joyce, Tong, & Woods, 2011). The two most important are the signalling effect and the portfolio rebalancing effect, which both reduce interest rates on long-term securities (Bailey et al, 2020). 1 The signaling effect -also called forward guidance -is the perception that the central bank's purchases of securities show its commitment to easing monetary policy in a sustainable manner by keeping short term interest rates low.…”