Topic 3 - Unconventional Monetary Policy Flashcards
(10 cards)
What were the interest rates like in the UK, US, Japan and Eurozone like at the start of the financial crisis?
reached historically low levels and were effectively zero
What was the problem with interest rates being this low for central banks?
In normal times interest rates is main tool of central banks.
If interest rates were very low then unconventional monetary policies may have to be used to flatten the yield curve.
what is the zero lower bound on nominal interest rates
it cannot reduce interest rates below zero as people would revert to holding cash rather than holding money in liquid bonds or interest paying bank accounts.
Why do central banks try to flatten the yield curves
so that rather than the intercept of yield curve reaching zero, the yield on long term bonds also reaches zero.
What is the effect of QE
QE involves the central bank buying a large amount of bonds to raise their prices and reduce their yield.
Flattening the yield curve and reducing longer term interest rates.
Name two more examples of unconventional monetary policies
Negative interest rates
Forward guidance
How do negative interest rates work
Banks are more likely to lend more if they are actually losing money by holding cash reserves
issue of negative interest rates
might simply cost banks money if they do not identify creditworthy borrowers.
Interest rates haven’t gone far into negative territory, therefore it is unsure whether it will necessarily work.
explain how forward guidance works
the central bank states that it has not only set the current interest rate very low but that it will maintain this very low level until the situation in the economy improves.
The intention of this policy is to flatten the yield curve
what is a problem with forward guidance
whether to compromise to keep interest rates very low is deemed credible by the private sector.
