Jointly with the Council on Economic Policies and the Swiss National Bank, the Study Center Gerzensee organized a conference on Aggregate and Distributive Effects of Unconventional Monetary Policies. The program can be viewed here.
In the FT, Claire Jones reports about the German Federal Constitutional Court’s decision to refer a case against the European Central Bank’s PSPP program to the European Court of Justice.
“In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank.” …
While Germany’s constitutional court said the OMT programme was legal, it stipulated, based on an earlier ECJ judgment, that bond purchases had to meet a number of requirements. On Tuesday the Karlsruhe-based court said there were “several factors” to indicate that one of these requirements — that bonds must be purchased on secondary markets and not directly from governments — was being violated under QE.
From the court’s statement:
… any programme relating to the purchase of government bonds on the secondary market must provide sufficient guarantees to effectively ensure observance of the prohibition of monetary financing. The Senate presumes that the Court of Justice of the European Union deems the conditions which it developed, and which limit the scope of the ECB policy decision on the Outright Monetary Transactions (OMT) programme of 6 September 2012, to be legally binding criteria. Against that background, the Senate further presumes that contempt of these criteria would amount to a violation of competences also with regard to other programmes relating to the purchases of government bonds.
… several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were – without exception – held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset.
… the PSPP decision can no longer be qualified as a monetary policy measure but instead must be deemed to constitute a measure that is primarily of an economic policy nature.
… the ECB Governing Council may be able to modify the rules on risk sharing within the Eurosystem in a way that would result in risks for the profit and loss accounts of the national central banks and also threaten the overall budgetary responsibility of national parliaments. Against that background, the question arises whether an unlimited distribution of risks between the national central banks of the Eurosystem regarding bonds in default where such bonds were issued by central governments or by issuers of equivalent status would violate Art. 123 and Art. 125 TFEU as well as Art. 4(2) TEU (in conjunction with Art. 79(3) GG).
Previous, related post.
In the 18th Geneva Report on the World Economy, Laurence Ball, Joseph Gagnon, Patrick Honohan and Signe Krogstrup ask whether “central banks can do [more] to provide stimulus when rates are near zero; and … whether policies exist that would lessen future constraints from the lower bound.”
They are optimistic and argue that the unconventional policies of recent years can be extended: “[I]t is likely that rates could go somewhat further than what has been done so far without adverse consequences” and “[m]ore stimulus can be provided if policymakers increase the scale of quantitative easing, and if they expand the range of assets they purchase to include risky assets such as equity.” While the authors concede that QE might have negative side effects they argue that the benefits are worth the costs.
To relax the zero lower bound constraint in the future, Ball, Gagnon, Honohan and Krogstrup argue in favor of a higher inflation target. They view cashless societies as not imminent but possible.
In his blog, Ben Bernanke discusses the merits of longer-term interest rate targeting as a monetary policy tool.
A lot would depend on the credibility of the Fed’s announcement. If investors do not believe that the Fed will be successful at pushing down the two-year rate … they will immediately sell their securities of two years’ maturity or less to the Fed. … the Fed could end up owning most or all of the eligible securities, with uncertain consequences for interest rates overall. On the other hand, if the Fed’s announcement is fully credible, the prices of eligible securities might move immediately to the targeted levels, and the Fed might achieve its objective without acquiring many securities at all.
… A policy of targeting longer-term rates is related to quantitative easing in that both involve buying potentially large quantities of securities. An important difference is that one sets a quantity and the other sets a price. … Concerns about “losing control of the balance sheet” were a factor behind the Fed’s choice of quantitative easing over rate targets while I was chairman.
Conceivably, QE and rate-pegging could be used together … with QE working through reduced risk premiums while the rate peg operates indirectly by affecting the expected path of short-term interest rates. … The principal limitations of rate pegs are similar to those of forward guidance: Both tools are relatively less effective at affecting interest rates at longer maturities, and even at shorter horizons both must be consistent with a credible or “time-consistent policy” path for short-term interest rates.
The public’s perception of central banks has changed during the crisis—and has created expectations that cannot be met. Beyond the buzzwords, the fundamental options for monetary policy makers are the same as always.
In his FT blog, Larry Summers argues for a “quite radical” change in government debt-management. He proposes several lessons:
- “Debt management is too important to leave to Federal debt managers and certainly to leave to the dealer community. … when interest rates are near zero, it has direct implications for monetary and fiscal policy and economic performance … and … financial stability.”
- “… it is fairly crazy for the Fed and Treasury, which are supposed to serve the national interest, to pursue diametrically opposed debt-management policies. This is what has happened in recent years, with the Fed seeking to shorten outstanding maturities and the Treasury seeking to term them out.”
- “Standard discussions of quantitative easing … are intellectually incoherent. It is the total impact of government activities on the stock of debt that the public must hold that should impact on financial markets.”
- In the US, “the quantity of long-term debt that the markets had to absorb in recent years was well above, rather than below, normal. This suggests that if QE was important in reducing rates or raising asset values it was because of signalling effects … not because of the direct effect of Fed purchases.”
- “The standard mantra that federal debt-management policies should seek to minimise government borrowing costs is … wrong and incomplete. … it is risk-adjusted expected costs that should be considered. … it is hard to see why the effects of debt policies on levels of demand and on financial stability should be ignored.”
- “The tax-smoothing aspect, which is central to academic theories of debt policy, is of trivial significance.”
- Rather than providing opportunities for carry trade, “[t]reasury should reverse the trend towards terming out the debt. Issuing shorter term debt would also help meet private demands for liquid short-term instruments without encouraging risky structures such as banks engaged in maturity transformation.”
- “Institutional mechanisms should be found to insure that in the future the Fed and Treasury are not pushing debt durations in opposite directions.”
In the FT, Willem Buiter proposes a 5 point plan for a way out of the Greek debt crisis:
- Greece effectively regains sovereignty and can do whatever it pleases, with some exceptions, see below.
- Greek debt held by the ECB is bought by the ESM: The ESM extends long-term, low-interest financing to Greece which Greece uses to repay the ECB debt. “Since most of Greece’s other sovereign liabilities have long maturities and deferred interest payments, payments to creditors would fall sharply.”
- No further financing by the IMF, the ESM or other official sources is extended to Greece.
- The ECB does no longer accept any Greek government debt paper as collateral or for purchase.
- Commercial banks in Greece are recapitalized or restructured using funds from the Hellenic Financial Stability Fund and other sources. The ECB bars Greek banks from accepting any Greek government debt paper.
The plan would require additional European taxpayer money for the ECB-ESM debt swap and the bank recapitalization. It would isolate the Greek banks from the mayhem triggered by government default.
Update: 7 July 2015
A related proposal by Willem Buiter and Ebrahim Rahbari.
The ECB announced the long-awaited expansion of asset purchases. The press release lists these main points:
- ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
- Combined monthly asset purchases to amount to €60 billion
- Purchases intended to be carried out until at least September 2016
- Programme designed to fulfil price stability mandate
Less expected is the arrangement for the sharing of “hypothetical losses”. The ECB will directly be exposed to only 20% of the risk of the additional asset purchases.
Another ECB website provides an overview over the ECB’s open market operations.
A blog post in Sober Look discusses recent ECB actions and the outlook.
James Hamilton reviews the short- and long-term effects of the Fed’s quantitate easing in Econbrowser: Clear effect in the very short term, nothing as clear in the longer term.
The Economist reviews the success or not of the Fed’s quantitative easing programs.
The Economist worries about deflation, specifically in the Euro area. The central passages are:
Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand. Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts—debts which, in real terms, will grow more burdensome under deflation.
… bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse.