## _041813a

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---

### Executive summary and key questions
- Key questions addressed:
  - What unconventional monetary policies (UMP) were tried, and with what objectives?
  - Were policies effective?
  - What role might these policies continue to play in the future?
- Two broad goals of UMP deployed by central banks in the United States, United Kingdom, Japan, and euro area:
  - Restore the functioning of financial markets and intermediation.
    - Instruments: targeted liquidity provision and private asset purchases (examples: TALF, LTROs, funding for lending schemes, purchases of MBS, agency bonds, covered bonds, commercial paper, corporate bonds, ETFs, REITs).
  - Provide further monetary policy accommodation at the zero lower bound (ZLB).
    - Instruments: forward guidance and government bond purchases (bond purchases/LSAPs/APP/QQME), aiming to decrease long nominal yields and raise inflation expectations.

### Conceptual framework — transmission failures and UMP rationale
- Pre-crisis transmission: short-term interest rate as key tool; channels via the yield curve, credit channel, exchange rate channel, and wealth channel.
- Crisis challenges:
  - Widespread financial disruptions weakened/broke arbitrage conditions and hindered transmission along the yield curve and across asset classes.
  - Markets could freeze or coordinate on “bad” self-fulfilling equilibria (rational runs).
  - Optimal policy rates were pushed below the ZLB.
- Two categories of UMP:
  - Restoring financial market functioning and intermediation (liquidity provision, private and public asset purchases).
  - Providing further accommodation at the ZLB (forward guidance, bond purchases).

### Objectives, instruments, and historical program sizing
- United States:
  - LSAP 1 (November 2008 to November 2009): Treasuries US$300 billion; Agency debt US$175 billion; MBS US$1.25 trillion.
  - LSAP 2 (November 2010 to June 2011): US$600 billion (Treasuries).
  - Maturity Extension Program (MEP or “Operations Twist”) (September 2011 to December 2012): US$667 billion (sold short-term in exchange for longer-term Treasuries).
  - LSAP 3 (began September 2012, first open-ended): focus on Agency MBS and followed in December 2012 with Treasury purchases.
- United Kingdom:
  - APP 1 (January 2009): £200 billion (longer-term Gilts).
  - APP 2 (began October 2011): £175 billion (longer-term Gilts).
- Japan:
  - Comprehensive Monetary Easing (CME) (October 2010): total purchases of ¥76 trillion originally planned by end 2013.
  - Quantitative and Qualitative Monetary Easing (QQME) (April 2013): aims at increasing the monetary base by ¥60 to ¥70 trillion annually, mostly through purchases of government bonds (longer maturity than former programs) and some private assets.
- Appendix highlights (selected dates and program features are listed, including specific forward guidance language and program increments).

### Conceptual choices for commitment and forward guidance
- Time inconsistency problem:
  - Forward guidance hinges on credibility; pledge to allow higher inflation/output during recovery can be undermined once recovery begins as reverting to prior policy becomes optimal.
- Commitment devices:
  - Preannounced thresholds for timing and pace of lift-off can increase reputational and financial costs of early exit.
  - Explicit policy rules (price-level targeting, nominal-GDP-level targeting) introduce history dependence and “make-up” obligations but face weaknesses:
    - Price-level targeting: loses benefits if Phillips curve is flat; may require very low inflation or deflation to offset past deviations.
    - Nominal GDP level targeting: real-time measurement of potential GDP/NGDP is problematic; revisions and optimism can unanchor expectations.
  - Threshold-based guidance:
    - Explicitly characterizes conditions leading to lift-off and avoids many pitfalls of level-targeting rules.
    - Example: The Fed’s December 2012 announcement: keep rates at the ZLB until unemployment declines to 6.5 percent so long as inflation projections 1 to 2 years ahead have not risen above 2.5 percent.

### Channels through which bond purchases decrease long-term nominal yields
- Signaling channel:
  - Bond purchases convince markets that the central bank is committed to a loose policy stance; shared with forward guidance.
- Scarcity channel:
  - A very large buyer reduces the supply of a specific bond available for trading; investors bid up price (lower yield) for that bond and close substitutes.
- Duration channel:
  - Large purchases of long-maturity bonds reduce portfolios’ exposure to interest rate risk, lowering the price of risk and yields across the curve.
- Scarcity and duration channels require segmented markets and limited arbitrage to operate.

### Evidence of effectiveness — restoring market functioning and intermediation
- General assessment:
  - Policies largely succeeded at achieving domestic goals, especially during peak financial turmoil.
  - Market functioning was broadly restored; tail risks declined significantly.
  - Policies decreased long-term bond yields and in some cases credit spreads.
  - Growth and price stability benefited, though results are less clear-cut due to long lags, unstable relations between variables, and unresolved counterfactuals.
- Specific program outcomes:
  - TALF: return of liquidity in securitized credit markets.
  - Cross-border FX swap lines: resumed cross-border money market arbitrage.
  - Three-year full-allotment LTROs (euro area): avoided massive bank deleveraging after December 2011.
  - OMT announcement: significantly decreased bond yields in stressed euro area countries and reduced sovereign-bank linkages.
  - U.S. LSAP 1 decreased MBS yields by 150 bps and mortgage rates by nearly 50 bps.
- Heterogeneity and limits:
  - Financial intermediation remains impaired in stressed euro area countries (high impaired assets, low profitability, weak loss absorption, elevated bank funding costs).
  - In U.S. and core euro area, lower bond yields transmitted to lower lending rates and supported credit volumes; in U.K. and stressed euro area countries, credit volumes as a share of GDP have been contracting and lending rates have not always followed lower bond yields.

### Evidence on forward guidance effectiveness and identification issues
- Forward guidance affected long-term interest rates even in conventional times (e.g., Campbell et al. (2012) finding on expected federal funds rate variation).
- Identification problem:
  - Forward guidance conveys both (i) central bank future policy reactions and (ii) views on output and inflation; isolating (i) is necessary to measure effectiveness.
- Empirical findings:
  - Swanson and Williams (2012): sensitivity of long-term government bond yields to macro news declines after explicit forward guidance.
  - Woodford (2012): “extended period of time” language (April 21, 2009) lowered expectations of future interest rates (example: one-year OIS decreased about 10 bps on April 21, 2009).
  - Event impacts: two–to five-year OIS decreased by around 10 bps following August 9, 2011 and January 25, 2012 Fed announcements; 10-year bond yields decreased by just under 10 bps on those latter dates.
  - BOJ conditional commitment and balance sheet expansion decreased bond yields up to 40–50 bps for three- to five-year bonds and 20 bps for 10-year bonds.
- Conditions reducing effectiveness:
  - Forward guidance is less effective when it does not signal deviation from the normal reaction function (e.g., Sweden; BOJ 1999–2000).

### Empirical measurement of bond purchase effects (event studies, surprises, channels)
- Event-study evidence on cumulative effects (10-year government bond yields):
  - U.S.: between 90 and 200 bps (estimates vary by methodology and event windows).
  - U.S., LSAP 1: largest effects between 50 bps and 100 bps.
  - U.K.: cumulative effects range from 45 bps to 160 bps.
  - Japan (CME and QQME): staff estimates reduced 10-year yields by a little over 30 bps.
- Role of surprises:
  - Surprises proxied by changes in one year ahead futures on short-term interest rates (one year ahead futures on 90-day Libor).
  - Estimated impacts: a 25 bps decrease in one year ahead futures would decrease 10-year bond yields, on average, by 25 bps in the U.S. and 20 bps in the U.K. and Japan.
  - Average surprise in the U.S. pre-crisis was around 7 bps; surprises associated with first announcements of bond purchases were between 20 bps and 50 bps.
- Channels of transmission:
  - Evidence points to prevalence of the signaling channel, though scarcity and duration occasionally mattered.
  - U.S. LSAP 1: balanced evidence for signaling and portfolio rebalancing channels; duration effects notable in LSAP 1A (MBS purchases).
  - MEP (“Operation Twist”): appears to have worked through the duration channel.
  - U.K.: evidence of portfolio rebalancing channel (scarcity and duration), possibly due to more segmented markets.
- Macroeconomic potency by channel:
  - A decrease in long-term yields via the signaling channel has an effect on GDP growth approximately twice as large as the same shock coming through portfolio rebalancing channels.

### Macroeconomic effects on growth and inflation
- General findings:
  - Bond purchases significantly improved macroeconomic conditions, though with considerable uncertainty about magnitudes.
  - Both GDP growth and inflation reacted positively and substantially to bond purchases; effects were short-lived but more persistent for inflation than for output.
- Magnitude estimates from literature:
  - GDP growth: most papers find increases around 2 percentage points in the U.S. and U.K. (generally lasting around two years), with a wide range between 0.1 percentage and 8 percentage points.
  - Inflation: effects reported as large as 3.6 percentage points (range is wide).
- Estimation caveats:
  - Time-varying relationships between growth, inflation, and bond yields; parameter instability present since mid 1980s and likely exacerbated by the crisis.

### International spillovers, flows, and heterogeneity
- Early announcements buoyed global asset prices and likely benefited trade; later announcements had smaller effects and increased capital flows to emerging markets.
- Weekly flows into U.S.-based emerging market bond and equity mutual funds:
  - Early Fed liquidity injections and LSAP announcements prompted repatriation to U.S. markets.
  - Later LSAP announcements boosted capital flows to emerging markets.
  - QQME announcement led to: a generalized fall in bond yields of around 10 bps; an appreciation of foreign currencies vis-à-vis the Japanese Yen of about 3 percent; a widespread fall in foreign equity prices of around 2 percent.
- Post-crisis flows:
  - "have been ample but not alarming"; moved back close to pre-crisis ample levels after a brief sudden stop; partial data suggest renewed pick-up in late 2012.
  - Geographic shift toward Asia and Latin America (away from pre-crisis focus on Eastern Europe).
- Recipient-country conditions and policy responses:
  - Effects depend on cyclical position, market depth, and currency valuation.
  - Recommended policies: rebalancing monetary and fiscal mix; allowing currencies to appreciate if not overvalued; building reserves if not more than adequate.
  - Macroprudential measures, deeper financial markets, stronger regulation/supervision, and institutional capacity reduce vulnerability.
  - In certain circumstances, temporary capital flow management measures may be appropriate.
- Source-country and multilateral considerations:
  - Source-country policymakers should consider spillovers; greater cross-border coordination and full implementation of regulatory and supervisory reforms would help mitigate risks.

### Risks, mitigation, and policy sequencing for continued UMP
- Diminishing effectiveness:
  - Theory and evidence suggest "diminishing returns" to bond purchases and forward guidance beyond a point.
  - Early programs had larger effects in acute uncertainty than later programs; larger or different programs could still have strong effects if unexpected or announced amid renewed weakness (example: BOJ’s QQME).
- Alternative measures and challenges:
  - Negative nominal rates face implementation hurdles (bounded by cost of holding cash; would impair interbank and derivatives markets).
  - Purchasing private assets is more fiscal in nature, raises legitimacy and comparative-advantage concerns, and may be appropriate only temporarily to address targeted distortions.
- Potential costs and mitigation:
  - Increased liquidity risk and moral hazard among intermediaries; remedy via strengthened supervision and resolution frameworks.
  - Greater risk-taking and mispricing of credit risk; initial mitigation via macroprudential policies rather than premature monetary tightening.
  - Delayed structural and fiscal reforms risk fiscal dominance and credibility loss; reforms are essential to enable unwinding of UMP.
  - Large and potentially volatile capital flows could persist or increase, risking abrupt reversals; recipient and source countries should adopt policies and prudential frameworks to manage spillovers.

### Exit from exceptionally easy monetary conditions — risks, quantified loss scenarios, and sequencing
- Exit risks:
  - Transmission could be bumpy when tightening and shrinking balance sheets; elevated interest rate volatility and overshooting of long-term rates are main risks.
  - Potential consequences: undermining recovery, financial stability strains, large capital flow and exchange rate fluctuations, and political risks from diminished central bank profit transfers.
- Box 2 mechanics:
  - Losses to central bank balance sheets arise from maturity mismatch between long-dated assets and largely short-dated or reserve-liability sensitive funding.
  - Interim or realized losses can occur if assets are sold or if interest paid on reserves exceeds asset returns.
  - ECB less exposed because assets are principally short-maturity loans to banks with yields indexed to the policy rate.
- Quantified NPV loss scenarios (estimates based on current and expected end-2013/end-2014 balance sheets, assuming everything else unchanged):
  - Scenario 1: a limited parallel shift in the yield curve by 100 bps from today’s levels.
  - Scenario 2: a flatter yield curve, 400 bps higher at the short end and 225 bps at the long (similar to Fed tightening Nov 1993–Feb 1995).
    - Losses in this case would amount to between 2 percent and 4.3 percent of GDP, depending on the central bank.
  - Scenario 3 (tail risk): short and long ends increase by 600 bps and 375 bps respectively.
    - Losses rise to between 2 percent and 7.5 percent of GDP.
  - Methodological note: losses are NPV estimates in response to a yield curve shift; losses do not necessarily imply asset sales.
- Recommended exit sequencing:
  - Begin with forward guidance on timing and pace of rate hikes.
  - Follow with higher short-term interest rates, guided by central bank floor rates until excess reserves are substantially removed.
  - Use term open market operations (“reverse repos” or other liquidity absorbing instruments) to drain excess reserves initially.
  - Outright asset sales likely more difficult early in transition; higher reserve requirements (remunerated or unremunerated) could be employed.
  - Central banks could maintain large balance sheets until assets mature.
- Transmission frictions and constraints:
  - Excess reserves can weaken transmission by reducing competition for funding.
  - Limits exist on how much liquidity can be absorbed at reasonable rates due to capital charges and leverage ratio constraints against repo lending.
  - Even gradual policy rate increases could produce sharp increases in longer-term yields via term premium jumps, leveraged investor runs, reverse portfolio rebalancing, inflation/fiscal uncertainty, or financial stability risks.

### Administrative and publication detail
- Date: April 18, 2013
- Approved by: Jose Viñals, Olivier Blanchard, and Tamim Bayoumi
- Prepared by: Karl Habermeier, Luis Jacome, Tommaso Mancini-Griffoli, Chikako Baba, Jiaqian Chen, Simon Gray, Tomas Mondino, Tahsin Saadi Sedik, Hideyuki Tanimoto, Kenichi Ueda, Nico Valckx (MCM), Giovanni Dell’Ariccia, Andrea Pescatori, Fabian Valencia (RES), Tamim Bayoumi, Silvia Sgherri, and Manju Ismael (SPR), with contributions from others.

*Source: EXECUTIVE SUMMARY, _041813a - UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS, April 18, 2013.*

### EXECUTIVE SUMMARY

### _041813a - EXECUTIVE SUMMARY

### Key questions addressed
- What unconventional monetary policies (UMP) were tried, and with what objectives?
- Were policies effective?
- What role might these policies continue to play in the future?

### Objectives and instruments
- Two broad goals of UMP deployed by central banks in the United States, United Kingdom, Japan, and euro area:
  - Restore the functioning of financial markets and intermediation.
    - Instruments: targeted liquidity provision and private asset purchases (examples: TALF, LTROs, funding for lending schemes, purchases of MBS, agency bonds, covered bonds, commercial paper, corporate bonds, ETFs, REITs).
  - Provide further monetary policy accommodation at the zero lower bound (ZLB).
    - Instruments: forward guidance and government bond purchases (bond purchases/LSAPs/APP/QQME), aiming to decrease long nominal yields and raise inflation expectations.

### Conceptual framework — transmission failures and UMP rationale
- Pre-crisis: short-term interest rate was the key tool; transmission via yield curve, credit channel, exchange rate channel, and wealth channel.
- Crisis challenges:
  - Widespread financial disruptions weakened/broke arbitrage conditions and hindered transmission along the yield curve and across asset classes.
  - Markets could freeze or coordinate on “bad” self-fulfilling equilibria (rational runs).
  - Optimal policy rates were pushed below the ZLB.
- Two categories of UMP:
  - Restoring financial market functioning and intermediation (liquidity provision, private and public asset purchases).
  - Providing further accommodation at the ZLB (forward guidance, bond purchases).

### Evidence of effectiveness — domestic outcomes
- Overall assessment:
  - Policies largely succeeded at achieving domestic goals, especially during peak financial turmoil.
  - Market functioning was broadly restored; tail risks declined significantly.
  - Policies decreased long-term bond yields, and in some cases credit spreads.
  - Growth and price stability benefited, though results are less clear-cut due to long lags, unstable relations between variables, and unresolved counterfactuals.
- Specific mechanisms and outcomes:
  - Aggressive liquidity provision addressed rational runs and confidence collapses by:
    - Extending liquidity to a wider set of recipients (including nonbank entities).
    - Targeting specific markets (repo operations extended to commercial paper and ABS).
    - Offering long-maturity funding, unlimited amounts, and expanded collateral (e.g., full-allotment LTROs; TAF).
    - Providing price backstops in volatile markets (e.g., TALF; central bank swap lines).
  - Private asset purchases supported financial intermediation by preventing fire-sale spirals, mitigating borrowing constraints, and lowering borrowing costs (examples cited above).
  - At the ZLB, forward guidance and government bond purchases directly targeted real long-term yields by lowering nominal long yields and increasing inflation expectations; both the Fed and BOJ strengthened forward guidance when at the ZLB.

### International spillovers
- Effects on the rest of the world were mixed:
  - Early announcements buoyed asset prices globally and likely benefited trade.
  - Later announcements had smaller effects and increased capital flows to emerging markets, with a shift to Latin America and Asia.
  - Sound macroeconomic policies in recipient countries can help manage these capital flows.
  - Excessive flows with risk of sudden reversals can create policy strains in recipient countries.

### Looking ahead — risks, mitigation, and policy sequencing
- Unconventional policies may continue to be warranted if economic conditions do not improve or worsen.
- Growing scale of UMP raises risks; some risks can be mitigated with macroprudential policies.
- A key concern: monetary policy being asked to do too much, creating breathing space that is not used to pursue needed fiscal, structural, and financial sector reforms.
- Fiscal, structural, and financial sector reforms are essential to ensure macroeconomic stability, entrench the recovery, and allow eventual unwinding of unconventional monetary policies.

### Administrative and publication detail
- Date: April 18, 2013
- Approved by: Jose Viñals, Olivier Blanchard, and Tamim Bayoumi
- Prepared by: Karl Habermeier, Luis Jacome, Tommaso Mancini-Griffoli, Chikako Baba, Jiaqian Chen, Simon Gray, Tomas Mondino, Tahsin Saadi Sedik, Hideyuki Tanimoto, Kenichi Ueda, Nico Valckx (MCM), Giovanni Dell’Ariccia, Andrea Pescatori, Fabian Valencia (RES), Tamim Bayoumi, Silvia Sgherri, and Manju Ismael (SPR), with contributions from others.

*Source: EXECUTIVE SUMMARY, _041813a - UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS, April 18, 2013.*

### 12.      However, forward guidance poses a time inconsistency problem.

### _041813a - 12.      However, forward guidance poses a time inconsistency problem.

### Time inconsistency and forward guidance at the ZLB
- Forward guidance effectiveness hinges on the credibility of the commitment.
- The time inconsistency problem: the central bank attempts to convince markets it will deviate from its old policy rule by allowing inflation (and output) to be higher in the recovery; once recovery starts, it becomes optimal to revert to the old rule and raise interest rates, undermining the original pledge.
- Preannounced thresholds for the timing and pace of interest rate “lift-off” from the ZLB and purchases of long-term assets can enhance credibility by increasing the central bank’s reputational and financial costs from early exit.
- Explicit policy rules—such as price-level or nominal-GDP-level targeting—may be used as commitment devices, but on the whole preannounced thresholds appear to be preferable to such rules.

### Price-level and nominal GDP level targeting versus thresholds (Box 1)
- Flexible price level targeting or nominal GDP level targeting:
  - Aim to minimize price or nominal GDP level deviations from a predetermined path; essential characteristic is history dependence (if indicator drops below target, central bank must “make up for it” later).
  - Theoretically serve as automatic stabilizers because prospects of higher inflation and growth following a recession support current activity.
  - Weaknesses of price-level targeting:
    - Loses benefits if inflation is not very sensitive to economic slack (the Phillips curve is flat).
    - May require very low inflation (or deflation) to offset a period of higher than average inflation, which could be procyclical with significant downward nominal rigidities.
  - Weaknesses of nominal GDP level targeting:
    - Complication of measuring potential GDP growth and nominal GDP in real time; measures are nearly always considerably revised, often with long lags.
    - Excessive optimism about real GDP prospects would translate into higher inflation, risking unanchored inflation expectations and increased uncertainty about the central bank's reaction function.
- Threshold-based guidance:
  - Explicitly characterize conditions or “thresholds” leading to an interest rate lift-off.
  - Avoids many pitfalls of the above rules while offering an automatic stabilizer: as the economy weakens, expectations automatically shift to a later lift-off date.
  - Conditions for lift-off can signal intention to provide higher temporary policy stimulus than under traditional rules.
  - Room for maneuver is limited because the central bank would otherwise need to announce willingness to accept an inflation rate much higher than its objective.
- Example: The Fed’s December 2012 announcement:
  - Keep rates at the ZLB until unemployment declines to 6.5 percent so long as inflation projections 1 to 2 years ahead have not risen above 2.5 percent, a level slightly above its inflation objective of 2 percent.

### Channels through which bond purchases decrease long-term nominal yields (paragraph 13 and expanded bullets)
- The signaling channel:
  - Functions under most conditions and is shared with forward guidance.
  - Bond purchases can convince markets that the central bank is committed to a loose policy stance.
  - Bond purchases support credibility if market participants perceive a rapid exit as difficult or costly; thus they can complement forward guidance.
- The scarcity channel:
  - A very large buyer (the central bank) reduces the supply of a specific bond available for trading.
  - Investors with particular preferences for that bond bid up its price (lower its yield) and also affect close substitutes.
- The duration channel:
  - Large purchases of long-maturity bonds make investors’ portfolios safer (less exposed to interest rate risk), decreasing the price of risk.
  - Investors then accept lower yields to hold remaining bonds, implying a downward shift of the entire yield curve rather than only where purchases occurred.
- Segmented markets are required for scarcity and duration channels to operate; segmentation arises when some investors prefer particular assets and there is limited arbitrage.

### Historical programs and sizing (paragraph 14)
- United States:
  - LSAP 1 (November 2008 to November 2009): Treasuries US$300 billion; Agency debt US$175 billion; MBS US$1.25 trillion.
  - LSAP 2 (November 2010 to June 2011): US$600 billion (Treasuries).
  - Maturity Extension Program (MEP or “Operations Twist”) (September 2011 to December 2012): US$667 billion (sold short-term in exchange for longer-term Treasuries).
  - LSAP 3 (began September 2012, first open-ended): focus on Agency MBS and followed in December 2012 with Treasury purchases.
- United Kingdom:
  - APP 1 (January 2009): £200 billion (longer-term Gilts).
  - APP 2 (began October 2011): £175 billion (longer-term Gilts).
- Japan:
  - Comprehensive Monetary Easing (CME) (October 2010): total purchases of ¥76 trillion originally planned by end 2013.
  - Quantitative and Qualitative Monetary Easing (QQME) (April 2013): aims at increasing the monetary base by ¥60 to ¥70 trillion annually, mostly through purchases of government bonds (longer maturity than former programs) and some private assets.

### Evidence of effectiveness — restoring financial markets and intermediation
- Policies to avoid acute risks and market impairments were generally highly effective:
  - The TALF in the U.S. led to return of liquidity in securitized credit markets.
  - Cross-border money market arbitrage resumed following foreign exchange swap lines.
  - Both programs became obsolete relatively quickly as market conditions normalized.
  - In the euro area, three-year full-allotment LTROs avoided massive bank deleveraging and an ensuing contraction in credits after frozen interbank markets in December 2011.
  - Announcement of OMT significantly decreased bond yields in stressed euro area countries, strengthening bank balance sheets and limiting potential sovereign-bank linkages.
- Private asset purchases to support financial intermediation:
  - In the U.S., LSAP 1 purchases of MBS and Agency bonds occurred when spreads over Treasuries were unusually high.
  - LSAP 1 appears to have decreased MBS yields by 150 bps and mortgage rates by nearly 50 bps.
  - Effects of private asset purchases differ by asset type: purchases of corporate bonds, ETFs, and J-REITs had significant effects during BOJ’s CME; effects limited for pre-2010 ABS purchases in Japan.
- Financial intermediation remains impaired in euro area countries under market stress:
  - High impaired assets, low profitability, weak loss absorption capacity, and elevated bank funding costs.
  - Interest rates on new loans have been rising in stressed countries, while decreasing in stronger economies.
  - Where intermediation remains impaired, further policy accommodation has dampened effects on lending and growth.
  - In U.S. and core euro area, lower bond yields have passed through to lower lending rates, supporting credit volumes (Japan exhibits a flatter pattern).
  - In U.K. and stressed euro area countries, credit volumes as a share of GDP have been contracting (especially to nonfinancial corporates), and lending rates have not always followed lower bond yields or the policy rate.

### Evidence on forward guidance effectiveness (section B)
- Forward guidance affected long-term interest rates even in conventional times:
  - Campbell et al. (2012): for the U.S. over a conventional sample, 90 percent of variation in the expected federal funds rate four quarters ahead is attributable to factors not related to surprises in timing of policy target changes.
- Identification problem:
  - Forward guidance conveys information about both (i) the central bank’s future policy reactions and (ii) its views on output and inflation; only (i) is relevant for measuring forward guidance effectiveness.
  - Event studies cannot always distinguish whether changes in expectations reflect changed beliefs about the reaction function or changed expected economic conditions; problem is acute at the ZLB when prolonged low-rate announcements may coincide with deteriorating output and inflation views.
- Empirical studies controlling for macro expectations find partial effectiveness during the crisis:
  - Swanson and Williams (2012): sensitivity of long-term government bond yields to macroeconomic news declines after explicit forward guidance.
  - Woodford (2012): “extended period of time” language by the U.S. Federal Reserve and Bank of Canada (April 21, 2009) lowered expectations of future interest rates as measured by OIS rates.
  - Example event impacts: one-year OIS decreased about 10 bps on April 21, 2009 following the Bank of Canada statement; two–to five-year OIS decreased by around 10 bps following the August 9, 2011 and January 25, 2012 Fed announcements; 10-year bond yields decreased by just under 10 bps on those latter dates.
- Conditions reducing effectiveness:
  - Forward guidance is less effective when it fails to signal deviation from the central bank’s “normal” reaction function (e.g., Sweden; BOJ 1999–2000 had negligible effect).
  - In contrast, BOJ’s later conditional commitment to maintain zero interest rates along with balance sheet expansion significantly decreased bond yields (up to 40–50 bps for three- to five-year bonds and 20 bps for 10-year bonds).

*International Monetary Fund — Unconventional Monetary Policies—Recent Experience and Prospects (excerpts).*

### 24.      This section asks four separate questions, each requiring a different analytical method.

### _041813a - 24.      This section asks four separate questions, each requiring a different analytical method.

### Questions and analytical methods
- Four distinct questions, each requiring a different analytical method:
  - What were the effects of bond purchases on long-term yields? — event study approach (cumulating changes in long-term yields on announcement days).
  - Have purchases been effective controlling for the surprise element? — regression analysis on event days; examines decrease in yields, alleviation of tail risks, and effectiveness relative to conventional rate cuts.
  - What were the main transmission channels—signaling, scarcity, or duration? — compare effects across different assets to distinguish channels.
  - Have bond purchases been effective at stimulating the economy? — gauge response of growth and inflation to a long-term interest rate shock in an empirical model.

### Total effects of bond purchases on long-term bonds
- Event-study approach is the preferred method but has two key assumptions:
  - (i) on the announcement day the announcement dominates all other shocks to bond yields;
  - (ii) bond prices are forward looking and react immediately and accurately to anticipated future purchases.
- Limitations of event studies:
  - May misestimate effects if they fail to control for the surprise element of announcements.
  - Short time window focus may miss more persistent changes in yields.
- Empirical evidence on cumulative effects (10-year government bond yields):
  - U.S.: between 90 and 200 bps (estimates vary by methodology and event windows).
  - U.S., LSAP 1: largest effects between 50 bps and 100 bps.
  - U.K.: cumulative effects range from 45 bps to 160 bps.
  - Japan (CME and QQME): staff estimates reduced 10-year yields by a little over 30 bps.

### Effectiveness of bond purchases and the role of surprises
- Surprise measurement and findings:
  - Surprises proxied by changes in one year ahead futures on short-term interest rates (one year ahead futures on 90-day Libor).
  - Best-fit relationships indicate bigger surprises had bigger effects on yields, including disappointing (positive) surprises that increased yields.
  - Estimated impacts: a 25 bps decrease in one year ahead futures would decrease 10-year bond yields, on average, by 25 bps in the U.S. and 20 bps in the U.K. and Japan.
- Comparisons with conventional rate cuts:
  - Changes in bond yields per unit of surprise were similar pre and post-crisis.
- Surprise magnitudes:
  - Average surprise in the U.S. pre-crisis was around 7 bps.
  - Surprises associated with the first announcements of bond purchases were between 20 bps and 50 bps.
- Tail-risk effects:
  - Initial announcements were especially effective at decreasing tail risks of a severe recession.
  - Tail risks proxied by highly liquid FX option risk-reversals decreased significantly following bond purchase announcements.
  - Skewness of inflation forecast distributions decreases noticeably after first announcements, suggesting reduced deflation (or very low inflation) tail risks.

### Channels of transmission for bond purchases
- Summary of empirical findings:
  - Evidence points to the prevalence of the signaling channel, though scarcity and duration channels occasionally played important roles.
  - U.S. LSAP 1: balanced evidence for signaling and portfolio rebalancing channels; one paper finds duration effects, notably in LSAP 1A when MBS purchases were first announced.
  - U.S. LSAP 2 and LSAP 3: continued evidence of signaling; scarcity may have played a role in LSAP 3 coinciding with MBS purchases.
  - BOJ CME purchases: appear to have affected government bond yields through the signaling channel (scarcity effects may be present relative to equity purchases).
  - MEP (“Operation Twist”), U.S.: appears to have worked through the duration channel (investors exchanging long-term bonds for short-term bonds).
  - U.K.: literature and staff mostly find evidence of portfolio rebalancing channel (both scarcity and duration), possibly due to more segmented markets.
- Macroeconomic potency by channel:
  - A decrease in long-term yields coming through the signaling channel has an effect on GDP growth approximately twice as large as the same shock coming through the portfolio rebalancing channels.
  - Rationale: portfolio-rebalancing shocks may be more temporary and reversible; lower premia induced by portfolio rebalancing may prompt firms to buy back shorter-term debt rather than invest productively.

### Effects on the economy
- General findings:
  - Bond purchases significantly improved macroeconomic conditions, though with considerable uncertainty about magnitudes.
  - Both GDP growth and inflation reacted positively and substantially to bond purchases; effects were short-lived but more persistent for inflation than for output.
- Magnitude estimates from literature:
  - GDP growth: most papers find increases around 2 percentage points in the U.S. and U.K. (generally lasting around two years), with a wide range between 0.1 percentage and 8 percentage points.
  - Inflation: effects reported as large as 3.6 percentage points (range is wide).
- Estimation uncertainty:
  - Staff emphasize time-varying relationship between growth, inflation, and bond yields.
  - Parameter instability in the relationship has been generally present throughout the sample, starting in the mid 1980s.
  - The financial crisis likely perturbed historical relationships further, with impaired banking and financial intermediation channels.

### International spillovers
- Analytical approach to spillovers:
  - Event study using announcement surprises to measure immediate effects on foreign bond yields, equity prices, exchange rates, and money market rates.
  - Complementary study of weekly flows into U.S.-based emerging market bond and equity funds.
  - Review of aggregate capital flow developments to capture persistent trends not seen in event analysis.
- Key findings on spillovers:
  - Foreign financial spillovers largest when policies restore market stability or significantly change the monetary framework.
  - LSAP 1: led to major global financial market rallies — generalized reductions in bond yields, rises in equity prices, and appreciation of foreign currencies vis-à-vis the U.S. dollar.
  - Early U.K. asset purchase announcements had similar exchange rate effects.
  - Later U.S. announcements had more muted effects or negative effects on equities and bond yields (e.g., LSAP 3 or the Fed’s MEP).
  - Earlier Japanese announcements sometimes appreciated the yen, reflecting repricing of yen-denominated assets and signals of a worse-than-expected global conjuncture.
  - BOJ QQME announcement in April 2013 had strong financial spillover effects.
  - ECB OMT announcement: raised bond yields in some core euro area countries and much of the rest of the world, but significantly lowered bond yields in the euro area periphery, reducing tail risks in the euro area and leading to a generalized rally in global equity markets.

*Source: _041813a - 24.      This section asks four separate questions, each requiring a different analytical method.*

### 38.      Weekly flows into U.S.-based emerging market bond and equity mutual funds suggest

_041813a - 38.      Weekly flows into U.S.-based emerging market bond and equity mutual funds suggest

### Key empirical findings on flows and market reactions
- Early Fed liquidity injections and LSAP announcements (in the aftermath of the Lehman collapse) "induced a substantial rebalancing in global portfolios, with investors repatriating capital from abroad to U.S. markets."
- Later LSAP announcements "seem to have boosted capital flows to emerging markets."
- QQME announcement led to:
  - "a generalized fall in bond yields of around 10 bps,"
  - "an appreciation of foreign currencies vis-à-vis the Japanese Yen of about 3 percent,"
  - "a widespread fall in foreign equity prices of around 2 percent."
- Post-crisis capital flows to emerging markets:
  - "have been ample but not alarming."
  - After a brief sudden stop during the crisis, flows "moved back close to the ample levels seen in the run up to the crisis."
  - "The most recent data, though partial, suggest a renewed pick-up of flows in late 2012."
  - Post-crisis flows involve significant debt-creating bond and bank (other investments) inflows and show a geographic shift toward Asia and Latin America (away from pre-crisis focus on Eastern Europe).

### Channels, conditions, and heterogeneity of effects
- Impact of unconventional monetary policies (UMP) on other countries depends on:
  - the cyclical position of the recipient economy (below vs. above capacity),
  - market imperfections and depth,
  - existing currency valuation relative to fundamentals.
- Beneficial channels when recipient is below capacity: lower bond yields, higher equity prices, reduction in tail risks supporting domestic demand.
- Destabilizing outcomes when markets are shallow or amplified by imperfections: excessive currency appreciation and volatility, unsustainable credit expansion, asset price bubbles (including in commodities like oil).
- Effects are time-varying and condition-dependent: UMP that reduce uncertainty and tail risks tended to be "broadly benign or at least balanced"; continued use that delays structural reforms could increase emerging market attractiveness and shift the balance.
- Portfolio rebalancing and signaling channels:
  - Signaling channel weakens as longer-maturity bond rates approach the ZLB and credibility of long horizons falls.
  - Portfolio rebalancing channels weaken as arbitrage conditions strengthen and financial sector health is restored, but persist if market functioning remains impaired.

### Policy recommendations and measures for recipient countries
- Essential macroeconomic policies in recipient countries:
  - "rebalancing the monetary and fiscal policy mix,"
  - "allowing currencies to appreciate if not overvalued,"
  - "building reserves if these are not more than adequate."
- Address systemic financial sector risks with macroprudential measures.
- "In certain circumstances, introducing capital flow management measures may also be appropriate to temporarily support needed macroeconomic adjustment."
- Deeper financial markets, stronger financial regulation and supervision, and improved institutional capacity help absorb flows and reduce vulnerability to reversals.

### Policy considerations for source countries and multilateral coordination
- Source-country policymakers should consider spillovers of their policies on global economic and financial stability.
- "Greater attention to the cross-border coordination of policies would also help to mitigate the riskiness of capital flows."
- Completion and full implementation of national and international regulatory and supervisory reforms would be helpful.

### Risks, management, and exit issues for continued UMP
- Diminishing effectiveness:
  - Theory and some evidence suggest "diminishing returns" to bond purchases and forward guidance beyond a point.
  - Early programs (e.g., LSAP 1) had larger effects in acute uncertainty than later programs; measured differences may reflect unexpectedness of early announcements.
  - A substantially different or larger program, or one announced amid renewed weakness, could still have strong effects (example: BOJ’s QQME).
- Alternative unconventional measures and their challenges:
  - Pushing nominal rates into negative territory faces implementation hurdles (bounded below by cost of holding cash; would impair interbank and derivatives markets).
  - Purchasing private assets (corporate or bank debt, equities, real estate) may be warranted temporarily to alleviate targeted distortions but are more fiscal in nature and pose legitimacy and comparative-advantage concerns for central banks outside emergencies.
- Potential costs and risks to manage:
  - Increased liquidity risk taken by banks and other intermediaries expecting central bank intervention; remedy includes widening supervision and improving resolution frameworks.
  - Greater risk-taking and possible mispricing of credit risk; initial mitigation via macroprudential policies rather than premature monetary tightening.
  - Delayed structural and fiscal reforms reducing future monetary policy effectiveness and risking fiscal dominance and credibility loss; reforms are essential to enable unwinding of UMP.
  - "Large and potentially volatile capital flows to other countries could persist or increase, with the potential for future abrupt reversals." Recipient and source countries should adopt policies and prudential frameworks to manage and internalize spillovers.

### Scenarios for future use of UMP and guidance
- Usefulness of further UMP depends on circumstances:
  - Most warranted and effective at the height of the crisis when severe financial distress caused market segmentation and arbitrage breakdown.
  - Effective in supporting aggregate demand once financial markets normalized, but to a lesser extent.
  - As economies recover and the ZLB constraint relaxes, the case for UMP wanes and the challenge becomes an orderly exit.
  - If conditions worsen with no undue inflation risk, UMP would likely remain appropriate.
  - In an intermediate sluggish recovery scenario, net benefits of UMP are ambiguous and weighing benefits against potential costs is more challenging.
- Policymakers must accept diminishing impacts or consider adopting new and more radical policy frameworks over time.

*Source: _041813a - 38.      Weekly flows into U.S.-based emerging market bond and equity mutual funds suggest*

### 48.      Finally, orderly exit from exceptionally easy monetary conditions may prove

### _041813a - 48.      Finally, orderly exit from exceptionally easy monetary conditions may prove

### Risks of exit and transmission challenges
- The transmission of policy could be bumpy when central banks begin to tighten and shrink their balance sheets.
- The crisis may have changed the relationship between various interest rates, and there is little experience in advanced economies with running monetary policy in the presence of large excess reserves.
- The main risk is interest rate volatility and overshooting in the adjustment of long-term rates.
- Potential consequences of a sharp rise in long-term interest rates:
  - Might undermine the recovery (including through effects on financial stability and investment).
  - Could induce large fluctuations in capital flows and exchange rates.
- Political risks:
  - Political interference could increase as central bank profit transfers to government diminish or disappear during the tightening cycle, as central banks make higher interest payments on reserves and realize losses from selling assets to shrink their balance sheets.
  - Absent actual or feared political interference, central bank losses and the size of balance sheets should not constrain the implementation of monetary policy.
- Reference to further discussion:
  - Box 2 and the Background Paper expand on these risks.
  - Chapter 3 of the April GFSR (IMF 2013c) discusses financial stability risks associated with exit.

### Box 2 — Potential Costs of Exit to Central Banks: key mechanics
- Losses to central bank balance sheets upon exit stem from a maturity mismatch between assets and liabilities.
- In normal circumstances, higher interest rates—and thus lower bond prices—lead to an immediate valuation loss fully recouped if assets are held to maturity.
- Two changes in the current environment amplify losses:
  - (i) balance sheets have grown enormously, and
  - (ii) assets purchased are much longer-dated on average and will likely not roll-off central bank balance sheets before exit begins.
- Valuation losses can become realized losses if central banks sell assets to permanently diminish excess reserves.
- Even without asset sales, interim losses arise from paying higher interest rates on reserves (and other liquidity absorbing instruments) than earned on assets held (mostly fixed coupon payments).
- The ECB is less exposed to losses from higher interest rates because its assets are primarily loans to banks of relatively short maturity and yields indexed on the policy rate; the ECB is thus not included in the estimates of losses that follow.

### Quantified loss scenarios (NPV estimates and assumptions)
- Losses are estimated given today’s balance sheet (no expansion) and the balance sheet that would result from expected purchases to end 2013 (end 2014 for the BOJ, accounting for QQME).
- Estimates assume everything else remains unchanged (notably absent capital gains or income from asset holdings).
- Methodological note: losses are estimated in net present value terms, in response to a shift in the yield curve; losses do not necessarily imply asset sales.
- Scenario definitions and outcomes:
  - Scenario 1: a limited parallel shift in the yield curve by 100 bps from today’s levels.
  - Scenario 2: a flatter yield curve, 400 bps higher at the short end and 225 bps at the long; this scenario is similar to the Fed’s tightening from November 1993 to February 1995 (one year rates increased by around 400bps).
    - Losses in this case would amount to between 2 percent and 4.3 percent of GDP, depending on the central bank.
    - Scenarios 2 and 3 foresee somewhat smaller hikes for the BOJ, given the persistence of the ZLB.
  - Scenario 3 (tail risk): short and long ends of the yield curve increase by 600 bps and 375 bps respectively.
    - Losses rise to between 2 percent and 7.5 percent of GDP.
- Footnote: McLaren and Smith (2013) arrive at different estimates for the Bank of England as they focus on losses net of capital gains and income from asset holdings.

### Appropriate sequence of policy actions in exit and transmission implications
- Recommended sequence:
  - Begin with forward guidance on timing and pace of interest rate hikes.
  - Follow with higher short-term interest rates, guided over a first (likely lengthy) period by central bank floor rates (which can be hiked independently of the level of reserves) until excess reserves are substantially removed.
  - Use term open market operations (“reverse repos” or other liquidity absorbing instruments) to drain excess reserves initially.
  - Outright asset sales would likely be more difficult in the early part of the transition, until the price of longer-term assets had adjusted.
  - Higher reserve requirements (remunerated or unremunerated) could also be employed.
  - Central banks could theoretically maintain large balance sheets until assets naturally came to maturity.
- Transmission frictions and risks:
  - Reduced competition for funding in the presence of substantial excess reserve balances tends to weaken the transmission mechanism.
  - Higher rates paid on reserves and other liquidity absorbing instruments should generally increase other short-term market rates, but market rates may lag (market segmentation, lack of arbitrage in a liquidity-flush market).
  - Limits exist on how much liquidity the central bank can absorb at reasonable rates because banks face capital charges and leverage ratio constraints against repo lending.
  - Even with gradual policy rate increases, longer-term yields could increase sharply due to limited control over the term premium and longer-term expectations.
    - Triggers for jumps in term premia include leveraged investors “running for the door,” expected reverse portfolio rebalancing effects from bond sales, uncertainty over inflation prospects, fiscal policy, financial stability, or other macro risks.
    - A rise in long-term rates that triggers cross-border flows can increase exchange rate volatility and complicate policy.

### Outlook and next steps
- The path ahead will be challenging, with many unknowns.
- Staff will continue building capacity in this critical area of policy and investigate the merits of policy options in a range of conditions, some adverse and others looking further ahead into tranquil times.
- A planned future Board paper will synthesize the results of this work, as well as conclusions from this paper and reflections on the output-inflation tradeoffs (Chapter 3 of the April 2013 World Economic Outlook, IMF 2013a) and the impact of loose monetary conditions on financial stability (Chapters 1 and 3 of the April 2013 Global Financial Stability Report, IMF 2013b and 2013c).

*UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS, INTERNATIONAL MONETARY FUND*

### References

### _041813a - References

### Theoretical foundations of monetary policy and liquidity
- Adrian, Tobias and Hyun Song Shin, 2009, “Money, Liquidity and Monetary Policy,” American Economic Review (papers and proceedings), Vol. 99, pp. 600–605.
- Auerbach, Alan and Maurice Obstfeld, 2005, “The Case for Open-Market Purchases in a Liquidity Trap,” The American Economic Review Vol. 95, No. 1 (Mar., 2005), pp. 110–137.
- Bagehot, Walter, 1873. Lombard Street. John Wiley & Sons, Inc. New York: New York.
- Bernanke, Ben and Gertler, Mark and Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, Vol. 78(1), pp. 1–15.
- Diamond, D. and Dybvig, P. 1983. Bank Runs, Deposit Insurance and Liquidity. Journal of Political Economy 91, pp. 401–19.
- Lucas, Robert Jr., 1972. "Expectations and the Neutrality of Money," Journal of Economic Theory, Elsevier, Vol. 4(2), pp. 103–124, April.
- Woodford, Michael, 2012, “Methods of Policy Accommodation at the Interest-Rate Lower Bound,” presented at the Jackson Hole symposium, August 2012.
- Svensson, Lars E.O., 2001, “The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap,” Bank of Japan Monetary and Economic Studies 19(S–1), pp. 277–312.

### Zero lower bound, liquidity traps, and alternative policy tools
- Bernanke, Ben S., Vincent R. Reinhart, and Brian P. Sack, 2004, "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Vol. 35(2), pp. 1–100.
- Eggertsson, Gauti and Michael Woodford, 2003, “Optimal Monetary Policy in a Liquidity Trap,” NBER Working Paper No. 9968.
- McCallum, Bennett, 2000, “Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates,” Journal of Money, Credit and Banking 32(2): pp. 870–904.
- Chung, H, J. Laforte, D. Reifschneider, and J. C. Williams (2012). “Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?” Journal of Money, Credit and Banking, Vol. 44 supplement (February), pp. 47–82.
- Hamilton, James D. and Jing Cynthia Wu (2011), “The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment,” Working Paper, University of California, San Diego, April 2011.
- Swanson, Eric T., and John C. Williams, 2012, “Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates,” Federal Reserve Bank of San Francisco Working Paper no, 2012–02, May 2012.

### Large-scale asset purchases, quantitative easing, and central-bank balance sheets
- Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack, 2011, “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases,” International Journal of Central Banking, Vol. 7(1), pp. 3–43.
- D'Amico, Stefania, William English, David López-Salido, and Edward Nelson, 2011, "The Federal Reserve’s Large-Scale Asset Purchase Programs: Rationale and Effects," Economic Journal.
- Krishnamurthy, Arvind and Annette Vissing-Jorgensen, 2011, “The Effects of Quantitative Easing on Interest Rates,” Brooking Papers on Economic Activity 43(2): pp. 215–287.
- Gertler, Mark and Peter Karadi. 2011. “A Model of Unconventional Monetary Policy.” Journal of Monetary Economics Vol. 58(1): pp. 17–34.
- Cur dia, Vasco, and Michael Woodford, 2011, “The Central-Bank Balance Sheet as an Instrument of Monetary Policy.” Journal of Monetary Economics Vol. 58(1): pp. 54–79.
- Joyce, M., D. Miles, A. Scott, and D. Vayanos, 2012, “Quantitative Easing and Unconventional Monetary Policy—an Introduction,” The Economic Journal, 122: F271–F288.
- Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong, “The Financial Market Impact of Quantitative Easing in the United Kingdom,” International Journal of Central Banking, 2011, Vol. 7(3), pp. 113–161.
- Rosa, Carlo, 2012, “How "Unconventional" Are Large-Scale Asset Purchases? The Impact of Monetary Policy on Asset Prices.” Federal Reserve Bank of New York Staff Report 560.
- Gertler, Mark and Peter Karadi, 2013, “QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool,” International Journal of Central Banking, January.

### Empirical and cross-country assessments of unconventional policies and spillovers
- Altavilla, Carlo. Michele Lenza. and Giovanni Vitale, 2013, “The effects of OMT announcements on financial markets and the real economy: a cross country assessment,” ECB internal mimeo.
- Bauer, Michael D. and Glenn D. Rudebusch, 2011. "The Signaling Channel for Federal Reserve Bond Purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
- Christensen, Jens H. E. and Glenn D. Rudebusch, 2012, “The Response of Interest Rates to U.S. and U.K. Quantitative Easing,” The Economic Journal 122(564): pp. 385–414.
- Gambacorta, Leonardo, Boris Hofmann, and Gert Peersman, 2012, “The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis,” BIS Working Paper, No. 384.
- Fratzscher, Lo Duca, and Straub, 2012, “A Global Monetary Tsunami? On the Spillovers of U.S. Quantitative Easing”. SSRN.
- International Monetary Fund, 2012b, 2012 Spillover Report, July.
- International Monetary Fund, 2011d, Japan—Spillover Report for the 2011 Article IV Consultation and Selected Issues, IMF Country Report No. 11/183, July.
- International Monetary Fund, 2011e, United Kingdom—Spillover Report for the 2011 Article IV Consultation and Supplementary Information, IMF Country Report No. 11/225.
- International Monetary Fund, 2011f, United States—Spillover Report for the 2011 Article IV Consultation, IMF Country Report No. 11/203, July.

### Financial stability, bank lending, systemic risk, and risk-taking
- Burnside, C., Eichenbaum, M. and Rebelo, S. 2004. Government Guarantees and Self-fulfilling Speculative Attacks. Journal of Economic Theory 119, pp. 31–63.
- De Nicolò, Gianni, Giovanni Dell’Ariccia, Luc Laeven, and Fabian Valencia, 2010, “Monetary Policy and Bank Risk Taking,” IMF Staff Position Note 10/09.
- De Nicolò, Gianni, and Marcella Lucchetta, 2012, “Systemic Risks and the Macroeconomy,” IMF Working Paper 10/29.
- Gambacorta, Leandro and David Marques-Ibanez, 2011, "The Bank Lending Channel: Lessons From the Crisis," Economic Policy, Vol. 26(66), pp. 135–182, 04.
- Jiménez, Gabriel, Steven Ongena, José Luis Peydró, and Jesús Saurina, 2009, "Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-taking?," Banco de Espana Working Papers 0833.
- Stein, Jeremy, 2012, “Evaluating Large-Scale Asset Purchases,” Speech given at the Brookings Institution, Washington D.C., October 11, 2012.
- Viñals, José, 2011, “The Do’s and Don’ts of Macroprudential Policy,” Speech given at European Commission and ECB Conference on Financial Integration and Stability, Brussels, May 2, 2011.

### Market microstructure, term structure, and limits to arbitrage
- Brunnermeier, Markus K., and Lasse Pedersen, 2009, Market Liquidity and Funding Liquidity, Review of Financial Studies, Vol. 22, pp. 2201–38.
- Greenwood, Robin and Dimitri Vayanos, 2010. "Price Pressure in the Government Bond Market," American Economic Review, vol. 100(2), pp. 585–90, May.
- Gromb, Denis and Dimitri Vayanos, 2002. "Equilibrium and Welfare in Markets with Financially Constrained Arbitrageurs," Journal of Financial Economics, Vol. 66(2–3), pp. 361–407.
- Gromb, Denis and Dimitri Vayanos, 2010. "Limits of Arbitrage," Annual Review of Financial Economics, vol. 2(1), pp. 251–275, December.
- Mancini-Griffoli, Tommaso and Angelo Ranaldo, 2010, “Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity,” Swiss National Bank Working Paper.
- Garleanu, Nicolae and Lasse Heje Pedersen, 2011. "Margin-Based Asset Pricing and Deviations from the Law of One Price," Review of Financial Studies, Vol. 24(6), pp. 1980–2022.
- Vayanos, Dimitri and Jean-Luc Vila, 2009, "A Preferred-Habitat Model of the Term Structure of Interest Rates," NBER Working Papers 15487.

### IMF and policy-oriented analyses included in the references
- Blanchard, Olivier, Giovanni Dell’Ariccia, and Paolo Mauro, 2010, “Rethinking Macroeconomic Policy,” IMF Staff Discussion Note 10/03.
- Cottarelli, Carlo and José Viñals, 2009, “A Strategy for Renormalizing Fiscal and Monetary Policies in Advanced Economies,” IMF Staff Position Note 09/22.
- International Monetary Fund, 2010, “Global Liquidity Expansion: Effects on “Receiving” Economies and Policy Response Options,” in Global Financial Stability Report, April.
- International Monetary Fund, 2013a, “The Dog That Didn’t Bark: Has Inflation Been Muzzled or Was it Just Sleeping?,” World Economic Outlook, Chapter 3, April.
- International Monetary Fund, 2013b, “Acute Risks Reduced: Actions Needed To Entrench Financial Stability,” in Global Financial Stability Report, Chapter 1, April.
- International Monetary Fund, 2013c, “Do Central Bank Policies Since the Crisis Carry Risks to Financial Stability?,” in Global Financial Stability Report, Chapter 3, April.
- Jacome, Luis, Marcela Matamoros-Indorf, Mrinalini Sharma, and Simon Townsend, “Central Bank Credit to the Government: What Can We Learn from International Practices,” IMF Working Paper 12/16.
- Saborowski, Christian and Sebastian Weber, 2013, "Assessing the Determinants of Interest Rate Transmission Through Conditional Impulse Response Functions," IMF Working Papers 13/23, International Monetary Fund.

*Content compiled from the References section of the source PDF.*

### Appendix Table 1. Selected Recent Unconventional Monetary Policies

### Appendix Table 1. Selected Recent Unconventional Monetary Policies

### Forward Guidance
- U.S. — 12/16/2008: The Federal Open Market Committee (FOMC) "anticipates...exceptionally low levels of the federal funds rate for some time."
- U.S. — 3/18/2009: The FOMC "anticipates...exceptionally low levels of the federal funds rate for an extended period."*
- U.S. — 9/13/2012: The FOMC "will continue to maintain interest rates extremely low until at least mid-2015."*
- U.S. — 12/12/2012: The FOMC "decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s two percent longer-run goal, and longer-term inflation expectations continue to be well anchored."
- Japan — 10/5/2010: The bank "will maintain the virtually zero interest rate policy until it judges, on the basis of the understanding of medium-to long-term price stability."
- Japan — 1/22/2013: The bank announces an inflation target of two percent in addition to open-ended asset purchases.*
- Japan — 4/4/2013: The bank announces its intention to meet its 2 percent price stability target over about 2 years.

### Bond Purchases
- U.S. — 3/18/2009 (LSAP1): The FOMC announces it will purchase longer-term Treasury securities (US$300 billion) over the next six months.* It had expressed intention to do so earlier on 1/28/2009 and Chairman Bernanke had expressed intention on 12/1/2008. On 8/12/2009 the FOMC decided to “gradually slow the pace” of Treasury purchases and removed “up to” language with reference to Treasury purchase limit.
- U.S. — 11/3/2010 (LSAP2): The FOMC "intends to purchase a further US$600 billion of longer term Treasury securities by the end of the second quarter of 2011, a pace of about US$75 billion per month." The FOMC expressed intention of purchasing longer-term Treasuries on 8/10/2010 and 9/21/2010. Chairman Bernanke expressed intention on 8/27/2010.
- U.S. — 9/21/2011 (MEP): The FOMC "intends to purchase, by the end of June 2012, US$400 billion of Treasury securities with remaining maturities of six years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of three years or less." On 6/20/2012 the FOMC “decided to continue throughout the end of the year its program to extend the average maturities of three years or less.”
- U.S. — 12/12/12 (LSAP3): The FOMC announced that in addition to its existing MBS purchase program, it would purchase longer-term Treasury securities initially at a pace of US$45 billion per month. Open ended.
- U.K. — 3/5/2009 (APP1): The MPC announces it will purchase £75 billion of assets over three months. Conventional bonds likely to constitute the majority of purchases, restricted to bonds with residual maturity between five and 25 years. Facility expanded to £125 billion on 5/7/2009, to £175 billion on 8/6/2009 (and to bonds with residual maturity of three+ years), and to £200 billion on 11/05/2009. Previously, on 1/19/2009 the chancellor of the Exchequer announced that the BOE would set up an asset purchase program. On 1/30/2009 the Asset Purchase Facility was established.
- U.K. — 10/6/2011 (APP2): The MPC announces it will expand asset purchases by £75 billion. An additional expansion by £50 billion is announced on 02/09/2012, and a further expansion by £50 billion on 7/05/2012.
- Japan — 10/5/2010 (CME): Announcement of purchases of Japanese government bonds (JGBs), commercial paper, corporate bonds, exchange traded funds (ETF), Japanese real estate investment trusts (J-REITS). Total purchases planned by end 2013: JPY 76 trillion. Expanded several times /2.*
- Japan — 4/4/2013 (QQME): Announcement of purchases of JGBs, ETFs and J-REITs with the goal of increasing the monetary base by JPY 60 to JPY 70 trillion annually, increasing the average maturity of JGBs held from three to seven years and meeting the 2 percent inflation target in about two years.*

### Targeted Liquidity Provision and Private Asset Purchases
- U.S. — 11/25/2008 (LSAP1): The Federal Reserve will purchase up to US$100 billion in agency debt and up to US$500 billion in MBS. The Fed announces the creation of the TALF. The FOMC expands the program on 3/18/2009 announcing it will purchase US$750 billion in MBS and US$100 billion in agency debt over the next six months. On 9/23/2009 the FOMC decided to “gradually slow the pace” of MBS purchases and removed “up to” language with reference to MBS purchases limit. On 11/4/2009 the FOMC announces it "will purchase...about US$175 billion of agency debt" and removed "up to" language with reference to agency debt limit.
- U.S. — 9/13/2012 (LSAP3): The FOMC will purchase US$40 billion MBS a month - open-ended.* Chairman Bernanke had expressed the intention on 8/31/2012.
- U.K. — 7/12/2012 (FLS): FLS is announced. Banks and building societies that increase lending to U.K. households and businesses will be able to borrow more in the FLS, and do so at lower cost than those that scale back lending.
- Japan — 5/21/2010: Introduction of the fund-provisioning measure to support strengthening the foundations for economic growth (loan support program).
- Japan — 10/30/2012: Introduction of fund-provisioning measure to stimulate bank lending.
- Japan — 10/5/2010 (CME): Announcement of purchases of Japanese government bonds, commercial paper, corporate bonds, exchange traded funds (ETF), Japanese real estate investment trusts (J-REITS). Total purchases planned by end 2013: JPY 76 trillion. Expanded several times /2.*
- Japan — 4/4/2013 (QQME): Announcement of purchases of JGBs, ETFs and J-REITs with the goal of increasing the monetary base by JPY 60 to JPY 70 trillion annually, increasing the average maturity of JGBs held from three to seven years and meeting the 2 percent inflation target in about two years.*
- Euro Area — 8/9/2007: ECB provides liquidity to permit orderly functioning of the money market. From August 9–14 it injects €335 billion into the euro area banking system.
- Euro Area — 12/12/2007 (FX swaps): ECB takes joint action with the Federal Reserve by offering U.S. dollar funding to eurosystem counterparties. Extended several times on future dates.
- Euro Area — 5/9/2010 (SMP): Securities Market Program (SMP) launched to ensure depth and liquidity in dysfunctional market segments (sovereign paper).
- Euro Area — 12/20/2011 and 2/28/2012 (LTRO): ECB announced two three-year LTROs, reduced the reserve ratio from two percent to one percent and expanded collateral availability (additional performing claims-NCB discretion).
- Euro Area — 9/6/2012 (OMT): Technical features of OMT. "A necessary condition for OMT transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) program." Mario Draghi expressed intention on 7/26/2012. The ECB first announced OMT on 8/2/2012.

*Source: Country authorities.  
Note: * Event is included in multiple entries.  
1/ Announcing an inflation target is more than just committing to temporarily loose policy in the future, instead it provides information about a permanent change in monetary policy.  
2/ Dates include 3/14/2011, 8/4/2011, 10/27/2011, 2/14/2012, 4/27/2012, 7/12/2012, 9/19/2012, 10/30/2012, and 12/20/2012, 1/22/2013.

*Source: Country authorities.*

### Appendix Table 4. Regression Results

### Appendix Table 4. Regression Results

### Response to a Monetary Policy Easing
- Country columns reported: U.S.; U.K.; JP /1
- Period definitions:
  - Pre is defined as 1/3/2000–7/8/2007
  - Post starts on the first announcement of bond purchases
- Footnotes:
  - /1 In Japan the Pre period refers to past asset purchase programs between 2001 and 2006, while the CME period refers to Comprehensive Monetary Easing. The QQME announcement was not included since a meaningful measure of surprise could not be extracted from the near-zero one year ahead futures on Libor.
  - /2 The principle component was used to extract a single series from the FX risk reversals between Japan, U.K., euro area, and U.S. A two-day window is used for the Risk Reversals to account for different time zones.

### Fixed Income — Statistically significant responses (arrows indicate statistically significant effects; two arrows indicate statistically greater effects)
- Gov Bond Yield 2-yr
  - U.S.:  Pre  Post
  - U.K.:  Pre  Post
  - JP:  Pre  CME
- Gov Bond Yield 10-yr
  - U.S.:  Pre  Post
  - U.K.:  Pre  Post
  - JP:  Pre  CME
- MBS Yield 15-yr
  - U.S.:  Pre  Post
- Agency Yield 10-yr
  - U.S.:  Pre  Post
- BBB-AAA Corp Spread
  - U.S.: n.s.
  - U.K.:  Post
  - JP: n.s

### Tail Risk
- PC: FX Risk Reversal /2
  - U.S.: n.s.
  - U.K.:  Post
  - JP:  CME
  - Additional entries: n.s.      n.s.

*Source: IMF staff estimates.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_041813a.pdf_