Unconventional Monetary Policies in the Euro Area, Japan, and the United Kingdom

Abstract

The global financial crisis hit hard in the euro area, the United Kingdom, and Japan. Real GDP from peak to trough contracted by about 6 percent in the euro area and the United Kingdom and by 9 percent in Japan. In all three cases, central banks cut interest rates aggressively and then, as policy rates approached zero, deployed a variety of untested and unconventional monetary policies. In doing so, they hoped to restore the functioning of financial markets, and also to provide further monetary policy accommodation once the policy rate reached the zero lower bound. In all three jurisdictions, the strategy entailed generous liquidity support for banks and other financial intermediaries and large-scale purchases of public (and in some cases private) assets. As a result, central banks’ balance sheets expanded to unprecedented levels. This paper examines the experience with unconventional monetary policies in the euro zone, the United Kingdom, and Japan. The paper starts with a discussion of how quantitative easing, forward guidance, and negative interest rate policies work in theory, and some of their potential side effects. It then reviews the implementation of unconventional monetary policy by the European Central Bank, the Bank of England, and the Bank of Japan, including a narrative of how central banks responded to the crisis and the evidence on the effects of unconventional monetary policy actions.

A Skeptical View of the Impact of the Fed’s Balance Sheet

“…Recent reviews of the impact of LSAP programs include Borio and Zabai (2016), Dell'Ariccia et al (2017) and Kuttner (2017). We build on these studies by providing new evidence on the overall importance of LSAPs in driving real and nominal 10-year bond yields.…”

Assessing Abenomics: Evidence from Inflation-Indexed Japanese Government Bonds

“…10 We identify six primary announcements associated with monetary policy changes under Abenomics. Our event dates include the introduction of an explicit two-percent inflation target and open-ended expansion of the asset purchase program on January 22, 2013; the introduction of the BoJ quantitative and qualitative easing program (QQE), under which the BoJ committed to double its monetary base and its holdings of JGBs over the following two years on April 3, 2013, see Hausman and Wieland (2014); the expansion of the BoJ QQE program, in which it raised its targeted monetary base expansion from 60-70 trillion yen to 80 trillion yen on October 31, 2014, see Hausman and Wieland (2015); the movement by the BoJ into negative policy rates on January 29, 2016; the introduction of "yield curve control" by the BoJ on September 21, 2016, under which the BoJ committed to keeping short-term rates on reserves at -0.1 percent and to continuing to purchase long-term JGBs to keep the ten-year rate close to 0, see Dell'Ariccia et al (2018). Furthermore, it committed to overshooting its two-percent inflation target.…”

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