Unonventional Monetary Policies

1. General topic

Over the last of decades, the monetary policy in advanced economies has fundamentally relied on the control of the benchmark interest rates to achieve its main objectives of controlling inflation and fostering economic growth and employment. During this period, the control of the benchmark interest rate was done through open market operations, monetary aggregates and exchange rates were free to adjust and market expectations were driven by a transparent central bank reaction function. Moreover, the transmission channels and monetary policy lags were relatively well understood.

In the aftermath of the 2008 financial crisis, the monetary policy paradigm was challenged along 2 main dimensions: (i) the financial disruptions hindered the channels through which interest rate changes impact the yield curve, asset prices and credit spreads and (ii) the nominal benchmark interest rates reached the so-called zero lower bound (ZLB), making it impossible for Central Banks to stimulate economies using traditional policy instruments.

The reaction of Central Banks in advanced economies came in the form of the so-called Unconventional Monetary Policies (UMP), which includes the expansion of the central bank’s role as lenders of last resort, forward policy guidance and large-scale asset purchases (LSAP). On the one hand, the expansion of central bank’s role as lender of last-resort has the main objective of avoiding bank runs and the collapse of confidence. On the other hand, the forward policy guidance and LSAPs have the main objective of providing further monetary policy accommodation in the zero lower bound by targeting the long-term yields.

Mainly due to the inherent uncertainty regarding this new set of monetary...

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... comprising firms for different sectors in the economy in the last decade. If such type of data were available, we would use a dynamic panel specification using as dependent variable firms profits in each quarter or number of people hired controlling for firm characteristics (past profitability, market size, number of employees etc), firm and sector fixed effects and time dummies for the dates in which the LSAPs were undertaken. To obtain the estimates for the coefficients of interest we would use the system GMM proposed by Arellano and Bover (1995) and Blundell and Bond (1998).

For the discussion of the advantages and disadvantages of the options available to revert those programs, further research needs to be done in order to define carefully the best theoretical framework to discuss advantages and disadvantages of “exit” options of the current monetary stance.