Friday, August 24, 2012

Unconventional monetary policy works so far - BIS paper

   Central banks have been successful in boosting economic activity and avoiding deflation by resorting to unconventional monetary policies after the eruption of the global financial crises in 2008, according to a study released by the Bank for International Settlements (BIS).
    While other studies have reached similar conclusions, the BIS working paper stands out because it specifically includes data from most advanced economies and exclusively focuses on the period 2008-2011 when central banks cut their interest rates to effectively zero.
    “As policy rates approached and ultimately got stuck at their effective lower bounds, central bank balance sheets basically replaced interest rates as the main policy instrument,” the three economists said.    
    “The challenge is to figure out a suitable econometric approach for analyzing the macroeconomic impact of central banks balance sheet policies in a crisis period when interest rates reach the zero lower bound,” they added.

   Earlier studies that have attempted to gauge the effectiveness of monetary policy in a post-crises world had several drawbacks.
    Firstly, they mainly looked at prices in financial markets, for example in money markets, and not the broader economy.  Secondly, the models used were developed prior to the financial crises, and this may not be adequate for the current situation. Thirdly, there have been a number of papers looking at the Bank of Japan’s experience with zero interest rates but it’s not clear whether that experience can be applied to a global level.
    The economies that were included in the paper’s panel analysis were  Canada, the euro area, Japan, Norway, Sweden, Switzerland, the United Kingdom and the United States.
    “For most economies, we find a significant positive temporary impact on economic activity and also the magnitude of the effect appears to be fairly similar. The effect on the price level is, however, somewhat more dispersed across countries. In only half of the countries the impact on prices seems to be significant.”
    Click to read the paper: "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis"


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