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By On October 17, 2018

Unconventional monetary policies in the euro area, Japan, and the United Kingdom

Skip to main content Editor's Note:

This paper will be presented at the event, “Unconventional monetary policy: How well did it work?” on October 17, 2018.


Giovanni Dell’Arricia

Deputy Director - Research Department, International Monetary Fund

Pau Rabanal

Deputy Division Chief - Research Department, International Monetary Fund

Damiano Sandri

Senior Economist - Western Hemisphere Department, International Monetary Fund

In response to the global financial crisis of 2008, the central banks of the euro area, Japan, and the United Kingdom deployed a variety of unconventional monetary policies i n an effort to support distressed financial markets and slowing economies. In a new Hutchins Center Working Paper, a version of which is forthcoming in the Journal of Economic Perspectives, Giovanni Dell’Ariccia, Pau Rabanal, and Damiano Sandri of the International Monetary Fund examine the effects of negative interest rates, forward guidance, and large-scale asset purchases. They argue the policies helped relieve financial distress, lower long-term interest rates, and support economic activity in all three regions.

Dell’Ariccia and coauthors review a large body of evidence that both large-scale asset purchases and forward guidance substantially reduced yields on long-term government bonds in the euro area, Japan, and the U.K. Research on Japan’s experience with negative interest rates also suggests they were able to lower short-term yields when the Bank of Japan’s policy rate sat at zero. Studies in all three regions show that the policies reduced corporate bond yields, lifted equity prices, and depreciated local currencies, although these effects were milder in Japan. And although evidence of their direct effects on GDP and inflation is more limited, studies indicate both forward guidance and large-scale asset purchases had positive effects on output by reducing long-term interest rates.

The authors outline three key lessons learned from the European, Japanese, and British experiences:

First, both forward guidance and large asset purchases are especially effective during periods of financial distressâ€"consistent with both market segmentation and uncertainty-based theories of why unconventional policies work. The Bank of England’s first round of asset purchases in 2009, for example, appear to have had larger effects than did purchases conducted after financial markets had stabilized.

Second, Japan’s experience demonstrates that unconventional policies are less effective when households and businesses have entr enched low-inflation expectations. The Bank of Japan’s forward guidance, for example, was largely ineffective, as firms and households already expected interest rates to remain near zero for some time prior to the launch of new policies.

Third, Dell’Ariccia and coauthors say central bank credibility is the key ingredient in effective policy; this was especially true for the European Central Bank and the Bank of England, where unconventional tools had never been used. In the euro area, for example, the European Central Bank’s (ECB) Long-Term Refinancing Operations in the early years of the crisis had little effect on lending rates and aggregate demand, as markets remained skeptical about the ECB’s authority or commitment to maintain the facility. The ECB’s major QE program, on the other hand, provided an open-ended and credible commitment to providing stimulus, and had much greater effects on sovereign bond yields. Still, the authors acknowledge that employing unconv entional tools encouraged skepticism and additional scrutiny of central banks that could put their independence at risk in the future.

Looking ahead, unconventional monetary policies could provide crucial relief in a future recession that pushes interest rates to the zero lower bound, the authors say. But existing toolsâ€" quantitative easing and negative interest rates in particularâ€"are limited in their effectiveness if inflation expectations become unanchored or the central bank cannot make credible commitments. Policymakers ought to consider how fiscal stimulus or monetary frameworks that reduce the likelihood of encountering the zero lower bound can complement unconventional monetary tools in the future.

Read the full paper here.

*Sage Belz and David Wessel contributed to this post.

A version of this paper will be published in the Fall 2018 issue of the Journal of Economic Perspectives, Volume 32, Number 4.

The authors did not receive financial support from any firm or person with a financial or political interest in this article. None is currently an officer, director, or board member of any organization with an interest in this article.

Wed Oct 17 Upcoming Event

Unconventional monetary policy: How well did it work?

- Washington, DC
Up Front

Hutchins Roundup: Medicaid’s effects on financial health, exchange rates and unconventional monetary policy, and more

Sage Belz, Finn Schuele, and Louise Sheiner

Report Produced by The Hutchins Center on Fiscal and Monetary Policy

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By On October 17, 2018

May vows she will not allow Brussels to break up the United Kingdom

Theresa May has vowed to protect the “precious Union of the United Kingdom” as she battles to keep her faltering hopes of a Brexit deal alive.

As the Prime Minister prepared to address leaders of the remaining 27 member states in Brussels, she insisted that she remained committed to securing an agreement with the EU.

However, during exchanges at Prime Minister’s Questions, Jeremy Corbyn said the Tories were too “weak and divided” to negotiate effectively with Brussels.

Mrs May travels to Brussels for what had been billed as “the moment of truth” in the negotiations amid growing concerns the two sides will be unable to bridge the gap over the key issue of the Northern Ireland border.

In the Commons however she made clear she would not accept any “backstop” arrangement to ensure the border with the Republic remains open which effectively drew a border between Northern Ireland and the rest of the UK.

“We continue to work for a good deal with the European Union â€" a deal that delivers on the Brexit vote but also a deal that protects jobs and livelihoods and crucially that protects the precious Union of the United Kingdom,” she said.

She added: “We will not accept any proposals which would effectively break up the United Kingdom.”

Source: Google News United Kingdom | Netizen 24 United Kingdom


By On October 17, 2018

'I will defend our United Kingdom until my last breath' vows David Mundell

Have your say

Scottish Secretary David Mundell has vowed to “defend our United Kingdom until my last breath,” after being accused of a power grab.

SNP MP Patrick Grady had accused Mr Mundell of “presiding over a power grab” during Scottish Questions in the Commons, adding: “Scottish Tories... have never wanted the Scottish Parliament to succeed and are using Brexit to undermine it.”

Mr Mundell responded: “He and his colleagues want to break up the United Kingdom.”

Mr Mundell was unapologetic about his ultimatum over a Brexit which in any way separates the UK.

“I make no apology for making absolutely clear that the integrity of the UK is a red line for me and my Scottish Conservative colleagues in any deal on leaving the EU,” he told the Commons during Scottish Questions.

“The position is exactly the same for our Prime Minister.

“I know those on the SNP benches’ preference would be a Brexit of the most disruptive kind, which they say is best able to take forward their cause.”

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Edinburgh takeaway’s horrendous reviews leave locals in stitches

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By On October 16, 2018

US to open trade talks with Japan, EU, UK

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