Evaluating Asset-Market Effects of Unconventional Monetary Policy

September 21, 2017

Chiara Scotti, Chief of Financial Stability Assessment, Board of Governors of the Federal Reserve System

After traditional monetary policies stagnated during the Great Recession of 2007 to 2009, central banks across the globe turned to alternative methods: unconventional monetary policies. These expansionary strategies, such as forward guidance and asset purchases, sought to stabilize economies and financial markets. Yet due to their novelty, questions around unconventional policies remain. Chiara Scotti of the U.S. Federal Reserve Board of Governors visited SAIS Europe for a discussion of monetary policies.

Scotti explained how the central banks in the U.S., EU, and Japan began using forward guidance: a promise to keep short-term rates low for a certain time. In the case of the Fed, initially the promise was open-ended and general, but eventually was attached to a calendar date of "mid-2013" and the to specific conditions such as "until unemployment is above 6.5 percent."

Next, the major central banks implemented different forms of asset purchases, mainly government bonds and agency debt, Scotti said. The Fed introduced Large Scale Asset Purchases programs to acquire assets, but in contrast, the European Central Bank was forbidden from buying government bonds to avoid the appearance of country buyouts and only bought assets insofar as to repair the transmission mechanism of monetary policy. The results made it easier for institutions to borrow money, Scotti said. Using an event-study approach, Scotti was able to estimate the pass-through effects of changes in government bond yields to other asset prices, showing that these unconventional monetary policies were successful in easing financial conditions. 

For more details, visit the Bologna Institute for Policy Research.