allison dolan, javier ramos, alex ouligian, bianca tomkoria 1 march 2011 introductionasset purchase...
TRANSCRIPT
Allison Dolan, Javier Ramos, Alex Ouligian, Bianca Tomkoria
1 March 2011
A monetary policy of central banks that entails buying bonds and other assets in order to inject liquidity to the market.
Process: The central bank electronically gives itself a set amount in its own account.
Buys bonds and other assets from commercial or investment banks
Similar but distinct from QE Buy sovereign debt Stabilize “dysfunctional” market segments
Restore monetary policy transmission mechanisms
3 and 6 month liquidity cycles Liquidity re-absorbed through other ECB operations
Used when interest rates are near zero
When the central bank is willing to risk inflation
When additional liquidity is needed, i.e. to prevent a liquidity trap
Used by the major central banks during the 2007-2010 Financial Crisis
May 2010 – Securities Asset Programme
2007 – US Fed Quantitative Easing
IMF: QE increased the stability of international financial markets during the 2007-2010 Financial Crisis
Restore some confidence in financial sector
ECB balance sheet is more risky in the case of Euro member default
Banks and other institutions don’t circulate the newly acquired cash
Banks invest their cash overseas or in speculative markets
Prolonged low interest rates may lead to financial bubbles in the future
Decreases fiscal agility of ECB in other areas
Quantitative Easing
Quantitative Easing SMPSMP
Possible inflation risks, especially if GDP growth does not keep up with the new issuance of debt
Banks and other institutions don’t circulate the newly acquired cash
Banks invest their cash overseas or in speculative markets
Prolonged low interest rates may lead to financial bubbles in the future
Escaping inflation… Ability to buy cheap imported goods▪ Eurozone might not be in the best position to do this because much of member states’ imports are from other members
When liquidity goes toward creating an asset bubble
Balance sheet has to be seen from a central bank perspective
Preventing future crises and stabilizing markets may involve a more united fiscal policy
Balance sheet has to be seen from a central bank perspective
Preventing future crises and stabilizing markets may involve a more united fiscal policy
German central bank and government are very much opposed to this idea
"What Spain advocates is that if we have a single currency, it's not enough just to have a central bank, a single central bank. It's not enough to have a single monetary policy. We also need to have a common economic policy"
Asset purchase programs have become an important tool for central banks for controlling more complex economies
12 – 18 month window to see inflationary effects
Don’t have much empirical evidence for the effects of these types of programs
▪ Japan in the 90s only strong case
And now, a lesson from South Park…
How things REALLY get decided at the Fed...
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