Unconventional Monetary Policy and Local Fiscal Policy

Bi, Huixin; Traum, Nora

doi:10.18651/rwp2022-15

Cited by 1 publication

(1 citation statement)

References 28 publications

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“…With the exception of perhaps China, central banks do not hold large amounts of assets in the longer-run [19] Ultimately, governments still hold the bag when a central bank goes broke – so all monetary policy is in some sense fiscal policy (Buiter, 2008). Yet, when the People’s Bank of China (PBOC) provides credit to banks and directs these banks to loan to particular enterprises, such an arrangement is the same as if the central bank lent directly (Li, 2013). For example, under the PBOC’s Pledged Supplementary Lending Scheme, the China Development Bank (the only institution eligible for the Scheme) received 1 trillion RBM from the central bank for urban development lending (Le et al ., 2014, at box 1).…”

Section: Structural Macro Disequilibriamentioning

confidence: 99%

When should central banks engage in private sector securities purchases?

Michael

Dalko

2023

JES

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Purpose The authors aim to look at the conditions under which central bank easing – and specifically the purchase of private sector securities – can/should contribute to growth, rather than fiscal policy and also ask when can the central bank’s purchase of private sector securities help supplant traditional monetary policy.Design/methodology/approachAfter surveying the existing literature, the authors use simple correlation of central bank private asset (stocks, bonds, etc.), interest rates, gross domestic product (GDP) growth, inflation and the extent of the functioning of domestic banking sectors (among others) to classify countries in which these purchases promote pro-growth investment.FindingsUnder the typical conditions for unconventional monetary policy, central bank purchases of private companies’ securities can promote growth in some places (like Bulgaria, the Ukraine, Georgia and Greece at the time of our writing) while hurting it in others (like in parts of Latin America and Africa in the mid-2010s). The authors find how such purchases effectively “bypass” dysfunctional banking systems and central/government local bodies fiscal spending, making the central bank the “funder of last resort” in many middle and lower income countries.Practical implicationsThis paper tells specific central banks to ramp up – or reduce – their purchases of private sector securities. The authors identify exact jurisdictions where such “helicopter money” has led to investment in the past economic growth.Originality/valueAll previous work on conventional and unconventional monetary policy has looked at the way monetary policy affects investment and growth through the banking system and holding companies’ reactions constant. The authors do the opposite – looking at how companies respond, holding banking system responses constant. No one has ever looked at these private purchases (taken from a special IMF database), much less tried to argue that central banks can sometimes target investment growth much better than fiscal policy. No one has ever considered them as a funder (rather than lender) of last resort.

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Section: Structural Macro Disequilibriamentioning

confidence: 99%