scholarly journals Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment

2020 ◽  
Author(s):  
Günter Coenen ◽  
Carlos Montes-Galdon ◽  
Frank Smets
Keyword(s):  
Interest Rate ◽  
Large Scale ◽  
Fiscal Stimulus ◽  
Forward Guidance ◽  
State Dependent ◽  
Rate Environment ◽  
Asset Purchases

The non-linear effects of the Fed asset purchases

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Alessio Anzuini
Keyword(s):  
Financial Markets ◽  
Large Scale ◽  
Balance Sheet ◽  
Monetary Economics ◽  
American Economic Review ◽  
Vector Autoregressive ◽  
Portfolio Balance ◽  
State Dependent ◽  
Linear Effects ◽  
Asset Purchases

Abstract The Federal Reserve responded to the great financial crisis deploying new monetary policy tools, the most notable of which being the expansion of its balance sheet. In a recent paper, Weale, M., and T. Wieladek. 2016. “What Are the Macroeconomic Effects of Asset Purchases?” Journal of Monetary Economics 79 (C): 81–93 show that the asset purchases were effective in stimulating economic activity as well as inflation and asset prices. Here I show that their results are state dependent: large scale asset purchase are effective only when financial markets are impaired. Financial markets are under stress when the effective risk-bearing capacity of the financial sector is drastically reduced, i.e. when the excess bond premium (EBP) of Gilchrist, S., and E. Zakrajšek. 2012. “Credit Spreads and Business Cycle Fluctuations.” The American Economic Review 102 (4): 1692–72 exceed a certain threshold. Using an estimated threshold vector autoregressive model conditional on the EBP regime, I show that an increase in the balance sheet has expansionary effects on GDP and inflation when EBP is high, but not when it is low (as its effects become mostly insignificant). I argue that the high EBP can be interpreted as a proxy of market dis-functioning so that only when this channel of transmission is on, the unconventional policy is particularly effective. This suggests that models of transmission of unconventional policies, based on asset purchases, should focus also on the market functioning channel and not only on the portfolio balance one.

Negative Interest Rate Policies—Initial Experiences and Assessments

Policy Papers ◽  
2017 ◽  
Vol 2017 (10) ◽  
Author(s):  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Large Scale ◽  
Central Banks ◽  
Transmission Channel ◽  
Advanced Economies ◽  
Policy Transmission ◽  
Limited Support ◽  
Asset Purchases ◽  
Cross Country

The depth of the crisis and the weakness of the ensuing recovery led to new ways to implement monetary policy. At the onset of the crisis, central banks in several advanced economies quickly moved policy rates to zero and initiated large-scale asset purchases. In more recent years, with inflation still below target and limited support from fiscal policy, several central banks lowered their policy rates below the previous zero lower bound, embarking on so-called negative interest rate policies (NIRPs). This paper explores the implications of NIRPs for monetary policy transmission and banks’ behavior. It considers potential differences between interest rate cuts in positive versus negative territory on deposit and lending rates, as well as banks’ interest rate margins and profitability, and market functioning. The paper focuses on the bank transmission channel, where differences between positive and negative policy rates could arise. Finally, the paper reviews cross-country experiences through case studies.

scholarly journals A Preferred‐Habitat Model of the Term Structure of Interest Rates

Econometrica ◽  
2021 ◽  
Vol 89 (1) ◽  
pp. 77-112 ◽  
Author(s):  
Dimitri Vayanos ◽  
Jean-Luc Vila
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Large Scale ◽  
Relative Effect ◽  
Habitat Model ◽  
Bond Risk Premia ◽  
Forward Guidance ◽  
Preferred Habitat ◽  
Asset Purchases ◽  
Bond Risk

We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk‐averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs' carry trades. Arbitrageurs earn rents from transmitting the shocks through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates underreact to forward‐guidance announcements about short rates. Large‐scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.

scholarly journals Austria

2020 ◽  
Vol 20 (63) ◽  
Author(s):  
Keyword(s):  
Interest Rate ◽  
Life Insurance ◽  
Large Scale ◽  
Gdp Growth ◽  
Insurance Sector ◽  
Investment Returns ◽  
Rate Environment ◽  
Single Premium ◽  
Duration Gap

The insurance sector is experiencing low growth, stemming mainly from life business and a prolonged low-interest-rate environment. While the total assets have increased in nominal terms, it has underperformed GDP growth. Some segments, in particular single-premium products in life insurance, are suffering from material declines of premiums. Insurers are coping with the challenges with large-scale mergers domestically and international expansions. The duration gap between asset and liabilities was one of the highest among the European peers. The average guaranteed rates remain high, while the investment returns continue to decline.

scholarly journals The Case for Open-Market Purchases in a Liquidity Trap

2005 ◽  
Vol 95 (1) ◽  
pp. 110-137 ◽  
Author(s):  
Alan J Auerbach ◽  
Maurice Obstfeld
Keyword(s):  
Interest Rate ◽  
Large Scale ◽  
Open Market ◽  
Macroeconomic Stabilization ◽  
Short Term ◽  
Liquidity Trap ◽  
Welfare Impact ◽  
Dynamic General Equilibrium Model ◽  
Policy Tool ◽  
Economic Experience

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan’s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan’s predicament. We argue Japan can achieve a substantial welfare improvement through large open-market purchases of domestic government debt.

Sign in / Sign up

Export Citation Format

Share Document