Unconventional Monetary Policies in the Euro Area, Japan, and the UK Giovanni Dell’Ariccia (IMF), Pau Rabanal (IMF) and Damiano Sandri (IMF) October 17th, 2018 The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Introduction Crisis hit the Euro Area, Japan, and the UK hard Central banks lowered policy rates close to ZLB and… … adopted a variety of unconventional monetary policies

Objectives, channels, and side effects Two distinct but connected objectives Provide stimulus at the ZLB Restore monetary policy transmission Transmission channels Market segmentation (QE) Signaling / commitment (forward guidance, QE) Possible side effects Bank profitability / stability Risk taking / misallocation of resources Runaway inflation Political economy of central bank independence

UMP in the Euro Area 2008–2009: provide liquidity support to banking sector Long-Term Refinancing Operations 2010–2012: backstop sovereign debt crisis and dispel fears of euro reversibility Security Market Program, €218b “Whatever it takes” and Outright Monetary Transactions Sizable and persistent effects on bond yields, positive impact on GDP and inflation 2013 onwards: support growth and inflation Forward guidance and Asset Purchase Program, €2.4t as of May 2018 NIRP -> downward shift in yield curves

UMP in the United Kingdom 2009–2012: support economic recovery Multiple rounds of QE, £375b QE1 had considerable effects, lowering yields by 50-100 bps QE2/3 seemingly smaller effects, but identification is challenging 2013-2014: dispel concerns of monetary tightening given above-target inflation Forward guidance with quantitative target, 7% unemployment Limited impact on yields, but less uncertainty about future rates 2016: support economic growth in face of Brexit vote QE4 (£60b government bonds, £10b corporate bonds)

UMP in Japan 2010–2012: delayed and weak monetary response to the crisis Forward guidance and limited asset purchases, ¥30t BoJ credibility undermined by persistent mild deflation 2013-2014: much greater stimulus as part of Abenomics 2% inflation target QQE: open-ended purchases of government bonds, ETFs, real estate trusts Inflation increased, but below target -> hard to defeat entrenched deflation 2016: renewed efforts to raise inflation NIRP and yield curve control

Key insights UMP provided stimulus at ZLB and helped restore monetary transmission Convincing evidence of significant impact on financial conditions Effect on macro variables (output/inflation) harder to measure Yet, when impact on LT yields large, difficult to imagine no macro benefits UMP more effective during financial distress (QE1 in UK, OMT in EA) But less effective when deflationary pressures are entrenched (Japan) central bank perceived as lacking commitment (BoJ pre-Abe, ECB with LTRO) So far, no major side effects have materialized but heightened political scrutiny

Conclusion UMP should remain part of the monetary toolkit It can provide crucial relief when ZLB binds However, UMP is no panacea Limits once LT yields approach zero / negative rates bounded as well Other levers: Fiscal/structural reforms, higher inflation target, nominal GDP targeting Open questions Decreasing returns from asset purchases? Stock or flow that matters? Should purchases be restricted to specific asset classes? When does UMP enter the realm of fiscal policy?