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Chapter 4. Conclusion
In this dissertation, we conduct two panel estimations to examine the macroeconomic effects of balance sheet policy in European Union countries over the crisis period. Some EU countries adopt unconventional monetary policies, such as euro area, UK and Sweden, while the others don’t. Some EU countries adopt euro while the others keep their own national currencies. However, literatures normally regard the whole euro area as a single statistical sample unit when discussing the macroeconomic responses after implementing balance sheet policy. This omits the fact that each country of euro area has different economic and financial conditions, balance of trade, government revenue, and expenditure; consequently, effects of balance sheet policy vary in EU country. Employing panel techniques highlights cross-country dimension of individual country responses, and allows cross-sectional heterogeneity and cross-sectional dependence in comparison with the overall results. This is also one of the contributions of this paper.
This paper has several contributions. Firstly, this model exhibits the cross-country heterogeneities of economic responses to the balance sheet policy shocks after the global financial crisis, as we stated above. Secondly, the results of the mean group Panel VAR model show that balance sheet policy overall has a significant positive effect on inflation, but the effect is small. Compared with Gambacorta et al. (2014), their peak value is 0.1%
(the peak value ) while our inflation response to balance sheet policy is 0.0015%, which is much smaller. The differences in our results due to either the various sample group countries, or various sample period spans,
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or both. The inflation effects of balance sheet policy are not as large as concerned. In results of EU country impulse responses, some countries show even declined inflation responses to balance sheet policy shocks, such as Belgium, Cyprus, Denmark, Spain, Ireland, Italy, Luxembourg, Poland, Slovenia, and Slovakia. We use the consumer prices index of each individual country which ignoring the effects of exchange rate for those non-euro countries, the influence of exchange rate regime is not in the scope of our research. Moreover, the empirical results of Haldane et al.
(2016) show that the inflation effects of asset purchase shock in ECB are far smaller than those in US. In particular, the inflation effects of some schemes reveal negative in response to the asset purchase shocks. Their conclusions also explain that the experience of Fed asset purchasing has better results than that of ECB.
Thirdly, the positive coefficient between the growth rate of monetary base and inflation could not be found as demonstrated in traditional literatures. This may probably be owing to the mistake of our data compilation, different data span, or a special period of time that monetary base and inflation reveal this relation. However, this result might alleviate concerns of monetary authorities regarding the upsurge of inflation accompanying with the fulfillment of balance sheet policy. From the monetary theoretical view, the expansion of monetary base may help the liquidity in the financial system, and encourage the real economic activities through money multiplier. Furthermore, monetary authorities conducting large-scale assets purchases are effective in increasing the high-power money, but are ineffective in producing sufficient money supply from our estimate results. Goodhart (2017) also indicates the causal direction of
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money multiplier equation, which had been given by Friedman and Schwartz (1963), was collapsed during the financial crises since 2008.
Alternatively, Koo (2015) attributes this to “balance sheet recession” in which corporates and households try to deleverage after the financial crises took place. The process of debt minimization reduced demand in the economies, which leads to severe recessions.
Finally, the increase of monetary base acts as a stabilizing force in financial system, but does not affect the macroeconomic variables. The coefficient between interest rate and inflation reveal a significant positive relation, which is counterintuitive, but in line with the impairment of interest rate policy in the zero-interest-rate circumstance after the crisis. In the estimation of Kucharčuková et al. (2016), they infer that the reason that the unconventional monetary measures did not affect the inflation directly because balance sheet policy is not essentially the easing monetary policy.
The large-scale asset purchase of central bank can maintain the financial market function properly. Empirical results of our model also show that rising inflation is not the inevitable consequence of rapid monetary base increase. From the results of panel VAR model, the macroeconomic variables of individual EU countries respond to the increase of monetary base ambiguously. When the interest hit the lower bound, monetary authorities have no choice but to increase the monetary base even if it does not produce an effective increase of money demand while borrowing money can be free.
In terms of further research, it would be worthwhile to investigate the monetary transmission mechanism and channels of monetary policy after 2008 global financial crisis during which major central bankers
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purchase large-scale asset in order to inject high-power money to the monetary system. Bernanke and Gertler (1995) suggest that monetary policy have a marked impact on GDP and price by the credit channel working through both non-financial borrower (firms and households) and bank balance sheet channel. Correspondingly, Ciccarelli et al. (2015) find that the effects of GDP and inflation to the monetary policy shock are amplified through credit channels by conducting a panel VAR model of 10 Euro area countries and a multivariate linear regression model of U.S.
Rather, Koo (2015) suggests that the decreasing lending indicators of major economies due to the process in which the private sector minimizes debt after the economic bubble bursting. In the process of debt minimization, two scenarios arise that fail to simulate real economy through channels of monetary policy when central bankers conduct unconventional monetary policy. First, lenders offer ultra-low interest rates to borrowers who lack investment opportunity. Second, lenders offer ultra-low interest rates only to high-rated borrowers. Thus, controversies still exist regarding channels of monetary policy vis-a-vi the large-scale asset purchase. These are the suggestion for further researches.
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Table of Monetary measures of US., Japan and Euro area after 2008 global financial crisis.
The Federal Reserve announces its intention of purchase up to $100 billion in agency debt securities and up to $500 billion in agency mortgage-backed securities.
The FOMC lowers the target of Federal funds rate
from range 0 to 0.25%, and keep Federal funds rate in the
exceptionally low levels.
Mar. 18, 2009 LSAP 1 Balance sheet policy
The FOMC announces the
expansion of LSAP1 to a total sum of $1.25 trillion of mortgage-backed securities, as well as the
$200 billion of debt securities and
$300 billion of longer-term Treasury securities.
Nov. 3, 2010 LSAP2 Balance sheet policy
The FOMC announces a second LSAP program which purchase an additional $600 billion of
The FOMC announces to keep the federal funds rate at exceptionally low levels until mid-2013.
Sep. 21, 2011 MEP Balance sheet policy
The FOMC announces MEP which it will buy $400 billion in Treasury securities with a remaining maturity of 6 to 30 years and sell equally $400 billion of Treasury securities with a
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remaining maturity of 3 years or less.
extension of low Federal rate to at least late 2014.
Jun. 20, 2012 MEP Balance sheet policy
The FOMC extends the ongoing MEP until the end of 2012 at the current pace of buying around $45 billion of longer-term Treasury securities per month, and selling or redeeming the shorter-term Treasury securities at the same time.
In connection with the launch of LSAP3, the FOMC indicates the exceptionally low federal funds rate is at least through mid-2015.
Sep. 13, 2012 LSAP3 Balance sheet policy
The FOMC announces the third LSAP program, consisting of open-ended purchases of mortgage-backed securities for
$40 billion per month. Fed also increases in the holdings of longer‐term securities for around
$85 billion per month to conjunct with the ongoing MEP.
The FOMC announces to keep the federal funds rate between 0 to 0.25 percent, and to maintains this exceptionally low range at least when the unemployment rate is above 6.5 %, inflation
expectations continue to anchored below 2.5 %.
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The FOMC announces to taper its purchases of MBS and longer-term Treasuries monthly of $35 billion and $40 billion,
respectively. Fed would start to reduce asset purchase in the further meetings.
The FOMC announces to maintain the present target range of federal funds rate.
The FOMC conclude its asset purchase program this month, but the reinvesting policy of maturing securities is maintained.
Oct. 29, 2014 Forward Guidance
Interest rate policy
The FOMC states that the federal fund rate remains on the target range from 0 to 0.25% for a considerable time after the end of APP this month.
Dec. 17, 2014 Balance
sheet policy
The Fed announces the normalized stance of monetary policy is coming soon.
Mar. 18, 2015 Forward Guidance
Interest rate policy
The FOMC changes the stance and replaces the indication that such increase will be appropriate when the FOMC "has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term" with the statement that
“remains unlikely” at the next FOMC meeting.
Jul. 29, 2015 Forward Guidance
Interest rate policy
The FOMC shifts the guidance allude to "further improvement in the labor market” to "some further
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The FOMC changes the condition
"how long it will be appropriate to maintain the target range" to
"whether it will be appropriate to raise the target range at its next meeting."
Dec. 16, 2015 Forward Guidance
Interest rate policy
This is first time that the FOMC increase the target range since the financial crisis. The FOMC suggests that "the stance of monetary policy maintains accommodative after this
increase." The FOMC also expects that it would continue its
reinvestment policy and warrant only gradual increase in the federal funds rate while economic conditions evolve.
Dec. 16, 2015 Balance
sheet policy
The FOMC increases the target range from its effective lower bound, meanwhile the FOMC also announce its remaining
reinvestment policy "until normalization of the level of the federal funds rate is well under way.”
Apr. 5, 2017 Balance
sheet poliy
The FOMC suggests that “most participants preferred to phase out or cease reinvestments of both Treasury securities and agency MBS,” and judged the
Committee’s reinvestment policy would appropriately change later this year.
Mar. 15, 2017 State-based guidance
Interest rate policy
The FOMC statement of "only gradual increases" on the future
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expectation of the federal funds rate is shifted to "gradual
increases." Besides, the statement now emphasizes the Committee's
"symmetric inflation goal" instead of its "inflation goal."
Bank of Japan
Oct. 31, 2008 Interest rate policy
State-contingent guidance
BOJ lower the target rate for the uncollateralized overnight call rate by 20 basis point to 0.3%, and basic loan rate to 0.5% (25 basis points reduced).
Dec. 19, 2008 Interest rate policy
State-contingent guidance
BOJ lower the target rate for the uncollateralized overnight call rate by 20 basis point to 0.1%, and basic loan rate to 0.3% (20 basis points reduced).
Oct. 5, 2010 CME Balance
sheet policy
BOJ will purchase assets about 35 trillion yen, which consisting of long-term government bonds, treasury discount bills,
commercial paper, asset-backed commercial paper, corporate bonds, ETFs and J-REITs, and fixed-rate funds-supplying operation against pooled collateral. The amount of the fixed-rate
funds-supplying-operation is about 30 trillion yen.
Oct. 5, 2010 which is the virtually zero interest rate policy until the medium to long-term price stability is in sight, and no accumulation of financial imbalances at the same
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Feb. 14, 2012 Enhancement of monetary 15-trillion-yen new funds of asset purchase program and 5-trillion-yen fixed-rate funds-supplying operation against pooled
collateral. BOJ increase the total amount of CME by 20-30 trillion yen by the end of 2012.
BOJ announces “its virtually zero interest rate policy” which based on the medium- to long-term price stability.
Dec. 20, 2012 Enhancement of monetary 36-trillion-yen new funds of asset purchase program and 17-trillion-yen loan support program for over 12 months and 24 months
respectively. BOJ increase the total amount of CME by 38 – 53 trillion yen.
Jan. 22, 2013 Interest rate policy
State-contingent guidance
BOJ announces “its virtually zero interest rate policy” which based on the medium- to long-term price stability. The target for price stability aimed at 2% , year-on-year rate of CPI.
Apr. 4, 2013 QQE Balance
sheet policy
BOJ introduces the QQE which will increase twofold of the monetary base and the amounts of JGBs as well as ETFs in two years, and more than twofold of the average remaining maturity of JGB purchases. The monetary base will increase 60-70 trillion
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which 10-20 trillion yen more than the past. System of negative interest rate policy with the expansion of QQE.Sep. 21, 2016 QQE with yield curve control
Mixed policies.
BOJ introduces the new policy framework which consisting of two important features, one is
“yield curve control” that BOJ control short-term and long-term interest rates; another one is
“inflation-overshooting
commitment” that BOJ expands monetary base until year-on-year rate of CPI exceeding 2 %.
European Central Bank Dec. 12, 2007 Reciprocal
currency agreement
Balance sheet policy
The measures designed The total amount of reciprocal currency maturity of six months as well as three months. Monthly LTROs is unchanged. The total amount of six-month LTROs is 50 billion euro, and of three-month LTROs is 100 billion euro.
The ECB announces to reduce interest rates of the main refinancing operation, the
marginal lending facility, and the deposit facility by 75 basis points, starting from 10 Dec. 2008.
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The Eurosystem started to conduct CBPP1 on 2nd July 2009, and this program completed on 30th June 2010. The total amount of CBPP1 is 60 billion euro.
May 10, 2010 SMP Balance
sheet policy
The ECB announces that central banks of Eurosystem conduct securities purchase for
interventions in the euro area public and private debt securities markets. The total amount of SMP is about 60 billion euro.
Nov. 3, 2011 CBPP2 Balance sheet policy
The Eurosystem started to conduct a CBPP2 on 3rd November 2011, and this program completed on 31st October 2012. The total amount of CBPP2 is 16.4 billion euro.
Dec. 8, 2011 VLTROs Balance sheet policy
ECB announces to conduct two VLTROs of 36-month maturity and early repayment option after one year. This measure starts on 14 Dec. 2011, and is expected to support bank lending and money market activity.
Sep. 6, 2012 OMT Balance
sheet policy
ECB decided to conduct OMT in the secondary markets o of
sovereign bonds in the euro area in order to secure the transmission mechanism and singleness of monetary policy in the euro area.
Countries which applying to European stability mechanism will are eligible to have their debt purchased unlimitedly by ECB in the secondary market.
Jul. 4, 2013 Open-end Interest rate ECB announces that the key
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guidance policy interest rates will “remain at present or lower levels for an extended period of time”.
Jun. 5, 2014 NIRP Interest rate policy
ECB announces to decrease the key interest rates, and the interest rate of deposit facility is first time lower under the zero to -0.1%.
This interest rate cut effective on 11th Jun. 2011.
Sep. 1, 2014 APP/ABSPP and CBPP3
Balance sheet policy
ECB decides to begin buying non-financial private sector assets. The APP consists of two categories, which are ABSPP, CBPP3, and the purchase pace is 60 billion euro per month until Sep. 2016.
ABSPP implement：The Eurosystem purchases a broad portfolio of simple and transparent asset-backed securities under ABS purchase program. CBPP3
implement: The Eurosystem purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase program.
Jan. 22, 2015 Expanded APP/PSPP
Balance sheet policy
ECB expands APP to comprise bonds issued by euro area central governments, agencies and European institutions, which was under PSPP. PSPP implement: The ECB purchases public sector
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The Eurosystem started to conduct a CSPP on 9th June 2016, and this program completed on 19th
December 2018. The total amount of CBPP2 is 17.7 billion euro.
Note: The Abbreviations as follows. LSAP stands for larger scale asset purchase, MEP stands for maturity extension program, CME stands for comprehensive monetary easing, ETFs stands for exchange-traded funds, J-REITs stands for Japan real estate investment trusts, QQE stands for quantitative and qualitative monetary easing, JGB stands for Japanese government bond, ETF stands for exchange-traded funds, LTRO stands for longer-term refinancing operation, CBPP1 stands for first covered bond purchase program, SMP stands for securities markets program, CBPP2 stands for second covered bond purchase program, VLTRO stands for very long term refinancing operation, OMT stands for outright monetary transactions, NIRP stands for negative interest rate policy, ABS stands for asset-backed securities, ABSPP stands for asset-backed securities purchase program, APP stands for asset purchase program, CBPP3 stands for covered bond purchase program, PSPP stands for public sector purchase program.
Sources: US compilation is based on the Federal Reserve website – Timelines of Policy Actions and Communications, Borio and Zabai (2018), Bauer and Neely (2014). Japan compilation is based on the Bank of Japan website – The Bank of Japan’s Policy Measures during the Financial Crisis and Asset Purchase Program, Borio and Zabai (2018), Bauer and Neely (2014), Nakaso and Rate (2017), Shizume (2018). ECB compilation is based on ECB website – monetary policy decisions, Borio and Zabai (2018).
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APPENDIX B
The Figure of the money and inflation statistic of European Union countries (18 countries)
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Source: Datastream, and Eurostat.
Notes: CPI is All-items HICP, all indicators are presented as growth rate of same period previous year, monthly data.
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Boeckx, J.; M. Dossche and G. Peersman. 2014. "Effectiveness and Transmission of the