Monetary policy in the next recession?
In this paper Cecchetti and al. explore a range of policy tools (forward
guidance, balance sheet tools and negative interest rates) that central bankers in Europe, Japan, and the United States have exploited to ease financial conditions at the zero lower bound. They find that:
- The global component of financial conditions is quite important;
- State-contingent forward guidance is the tool most associated with improved conditions;
- The new monetary policy tools generally were not sufficient to overcome the headwinds already present;
- The new monetary policy tools were strong enough to ease financial conditions overall in fewer than 30 percent of the cases in their sample.
Monetary Policy in the Next Recession?
Authors: Stephen G. Cecchetti, Michael Feroli, Anil K. Kashyap, Catherine L. Mann, Kermit L. Schoenholtz
From: Brandeis University, JPMorgan, University of Chicago, Citigroup, New York University
The effectiveness of the new monetary policy tools in Europe
Evidence suggests that the enhanced forward guidance we introduced last September is well understood by market participants. The interest rate lift-off dates in survey-based measures largely coincide with the time at which inflation expectations two years ahead – the horizon of the ECB/Eurosystem staff macroeconomic projections – are around levels close to, but below, 2 percent. This indicates that the link between our interest rate forward guidance and the inflation threshold is understood.
There is also evidence that negative rates have increased corporate investment: firms with large holdings of liquid assets that are exposed to negative deposit rates have increased investment compared with firms with small holdings of liquid assets that are less affected by negative deposit rates (see Chart 5).[14] This effect is economically significant and estimated to boost corporate investment by as much as 1 percentage point per annum.
The monetary policy toolbox: evidence from the euro area
By: Philip R. Lane – ECB
