## During the escalating stages of the current economic and financial crisis, advanced country central banks faced difficult choices.

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### Context and initial conditions
- Stress first appeared in the financial system in the second half of 2007 and was initially perceived as limited to a few isolated markets; the main systemic concern was liquidity.
- Uncertainty about the size and distribution of losses on subprime mortgage securities raised concerns about counterparty risk and increased the price of and reduced the availability of interbank financing.
- Growth started to slow while inflation spiked, driven by a significant increase in commodity prices.

### Early conventional responses and divergence in policy rates
- Central banks increased the scale of liquidity-providing operations while attempting to control the macroeconomy by adjusting policy interest rates.
- Liquidity provision was largely sterilized via open-market operations, altering composition but not the size of balance sheets.
- Actions on policy rates diverged substantially during the first year of the crisis:
  - The U.S. Federal Reserve (Fed) cut its policy rate aggressively.
  - The European Central Bank (ECB) raised its main refinancing rate ¼ percentage point in July 2008 (Trichet, 2009b).
- Specific Fed adjustments:
  - "The target for the federal funds rate was reduced by 325 bps to 2 percent between September 2007 and April 2008."
  - "Also, the spread between the primary discount window rate and the policy rate was cut to 25 bps from the usual 100 bps within this time period."

### Crisis intensification after September 2008
- After the bankruptcy of Lehman Brothers and near-failures in September 2008:
  - Traditional tools proved insufficient to address collapse of aggregate demand and freezing of key credit markets.
  - Policy rates reached effective lower bounds and further cuts were insufficient because of: size of the shock; offset from a drop in inflation expectations on real rates; disruptions in transmission from policy rates to private borrowing rates and the real economy.
- Financial intermediation materially weakened:
  - Capital adequacy of systemically important financial institutions was questioned.
  - Wholesale funding markets were under stress; commercial banks tightened lending standards considerably.
  - Nonbank financing, particularly via private-label securitization, virtually came to a halt.
  - Access to credit for households and businesses was severely curtailed and its cost rose.

### Fiscal and regulatory policy responses
- Policymakers took decisive measures to stabilize markets and institutions and to limit economic contraction:
  - Steps to guarantee bank liabilities.
  - Recapitalization of financial institutions.
  - Measures to limit portfolio losses.
  - Adoption of large fiscal stimulus packages to bolster aggregate demand.

### Unconventional monetary policy actions by central banks (menu and objectives)
- Central banks adopted unconventional policies, including:
  - Explicit commitment to keep policy rates low until recovery takes hold.
  - Providing broad liquidity to financial institutions to enable on-lending.
  - Affecting long-term interest rates by purchasing treasury securities.
  - Direct interventions in specific credit market segments (loans to nonfinancial corporations, purchase of private assets, loans linked to acquisition of private-sector assets).
- This paper examines unconventional monetary policy actions undertaken by G-7 central banks and assesses effectiveness in alleviating financial market pressures and facilitating credit flows to the real economy.

### Detailed mechanics and rationale for the four approaches
- Commitment to keeping short-term rates low:
  - Anchors expectations and keeps inflation expectations from declining to prevent a rise in real rates.
  - Effectiveness depends on credibility and restricts future options.
- Extraordinary low-cost financing to financial institutions:
  - Implemented through existing or new facilities, lending at longer maturities, broadening eligible collateral, and expanding counterparties.
  - May not translate into more credit if banks are capital constrained, shrinking balance sheets, or risk averse.
- Purchases of longer-term government securities:
  - Aim to reduce long-term private borrowing rates because treasuries benchmark private asset pricing.
  - Banks may hold proceeds as reserves if profitable lending opportunities are limited.
  - Risks include limited impact if purchases are small relative to government bond markets and potential capital losses when yields rise.
- Credit market interventions:
  - Reduce liquidity premiums, establish benchmark prices, and encourage origination in illiquid markets.
  - Require eligible securities as collateral with overcollateralization to protect the central bank.
  - Useful both near-zero and above-zero short-term nominal interest rates when dislocations threaten wider financial stability.
  - Pose logistical challenges and expose central banks to greater credit risk and potential market distortions.

### Nomenclature and taxonomy (observed usage)
- Terms lack consistent definitions across authorities and commentators:
  - Bank of Japan (2001–2006): QE targeted amount of excess reserves, primarily by buying government securities.
  - Bernanke (2009): CE encompassed all Fed operations to extend credit or purchase securities; focus on composition of balance sheet rather than size.
  - Buiter (2008): QE expands monetary base; "qualitative easing" shifts composition toward less liquid/riskier assets while holding size constant.
  - Bank of Canada (2009): QE—purchase of government or private securities financed by creation of reserves; CE—acquisition of private assets in key markets.
  - Bank of England distinction: "conventional unconventional" (purchases of highly liquid assets to boost money supply) vs. "unconventional unconventional" (targeted asset purchases to improve liquidity in credit markets).
  - ECB labeled its approach "enhanced credit support," centering on ample liquidity provision; limited asset purchases to covered bonds but full-allotment auctions expanded balance sheet and excess reserves.

### Advantages and drawbacks of approaches (summary)
- Commitment to low rates:
  - Easy to announce, useful under high policy uncertainty, encourages long-term investment; effectiveness hinges on credibility and restricts future options.
- Increasing bank reserves via liquidity facilities:
  - Easily implemented, low credit risk to central bank, reduces run risk, self-unwinding and few exit problems; may not increase lending if banks are capital-constrained or risk averse.
- Purchasing long-term securities:
  - Familiar, minimal credit risk, signals desire to lower long-term rates; may have limited impact if purchases are small relative to market, may raise long-term rates if perceived as fiscal monetization, and exposes central bank to capital losses.
- Providing credit directly to end borrowers:
  - Potentially more effective when banks’ capacity/willingness to lend is impaired, signals aggressive policy; logistical challenges, greater credit risk, possible market distortions and uneven effects across credit segments.

### Measures taken by G-7 central banks (initial steps and innovations)
- Enhanced liquidity provision early in the crisis; extended maturity of lending operations; expanded eligible collateral lists for repurchase operations.
- ECB emphasized enhanced liquidity provision, leveraging its existing broad counterparties and less restrictive collateral rules.
- Expanded access to lender-of-last-resort facilities to nonbank financial sector and foreign banks.
- U.S. Fed innovations:
  - Term Auction Facility (TAF) with anonymous auction lending to depository institutions.
  - Reciprocal currency swap arrangements with other central banks to increase dollar funding availability.
  - Primary Dealer Credit Facility (PDCF) to give some investment banks access to lender-of-last-resort funding.
  - Term Securities Lending Facility (TSLF) to increase supply of high-quality collateral like U.S. treasuries.

### Historical experience with unconventional monetary policy (Box 2 highlights)

- Japan: ZIRP and Quantitative Easing (1999–2006)
  - BoJ introduced ZIRP in early 1999; QEP introduced March 19, 2001 with a target on bank reserves at the BoJ at around 5 trillion yen, subsequently increased to 30-35 trillion yen; QEP terminated on March 9, 2006.
  - BoJ increased outright purchases of long-term Japanese government bonds and supported lending through special operations.
  - After QEP ended, BoJ reduced the size of its balance sheet and excess reserves fairly quickly; raised the policy rate only marginally—to 50 basis points—over the year following termination of QEP.
  - Evidence: commitment to low rates under ZIRP affected policy rate expectations; QEP effective in lowering yield curve according to cited studies.

- U.S. Federal Reserve: Credit Easing and Targeted Facilities
  - Purchases of government bonds and MBS issued by U.S. GSEs; set up facilities to support commercial paper and TALF to jump-start private-sector securitization.
  - TALF specifics:
    - Operational since March 25.
    - Provides 3- and 5-year non-recourse loans to holders of eligible asset-backed securities (ABS).
    - Program authorized to lend up to $200 billion.
    - Eligible ABS include high-quality newly issued ABS backed by student, auto, credit card, small business, and commercial mortgage loans (CMBS).
    - Overcollateralization ranges from 5 to 16 percent, depending on collateral and maturity.
    - Interest rate generally set at 100 basis points above 1-month LIBOR for floating rate loans or above the 3-year LIBOR swap rate for fixed rate loans.
    - Fed’s balance sheet mitigates risk via overcollateralization and a $20 billion capital infusion from the Treasury.
    - TALF accepts legacy CMBS issued before January 1, 2009 to work with Treasury’s PPIP.
  - Other Fed facilities:
    - AMLF: non-recourse loans to banks to finance purchases of high-quality ABCP from MMMFs.
    - CPFF: finances an SPV that purchases top-rated 3-month commercial paper directly from issuers; Treasury made a special deposit to reduce Fed credit risk.
    - MMIFF: designed to fund purchases up to 90 days through private SPVs; required subordinated ABCP equal to 10% of the asset’s purchase price; expired on October 30, 2009 without being tapped.

- Bank of England and Bank of Japan: large-scale government bond purchases and limited private asset purchases
  - BoE authorized up to ₤150 billion of assets, including a maximum of ₤50 billion private-sector assets; APP announced March 5 for ₤75 billion, subsequently scaled to ₤175 billion.
    - ₤175 billion equals 41 percent of outstanding gilts in the relevant maturity range and nearly 80 percent of planned debt issuance in FY2009.
    - Net purchases to date around ₤1 billion each of commercial paper and corporate bonds.
  - BoJ scaled up outright purchases from ¥1.2 trillion per month to ¥1.4 trillion in December 2008 and to ¥1.8 trillion per month starting in March.
    - At ¥1.8 trillion per month, annual purchases amount to 2½ percent of the federal debt outstanding in early 2009 but close to 50 percent of the net bond issuance projected for 2009.
    - BoJ limits on private securities: commercial paper holdings limit ¥3 trillion; corporate bond holdings limit ¥1 trillion; October 2008 suspension of divestment of stocks; February 2009 start of purchasing stocks from financial institutions—program limited to ¥1 trillion.

- ECB, Bank of Canada, and cross-country differences
  - ECB followed “enhanced credit support”: boosted liquidity facilities, expanded collateral and term of liquidity operations, auctioned €442 billion of one-year funds at 1 percent in late June and another €75 billion in late September, initiated a €60 billion program to buy covered bonds beginning July 2009.
  - Bank of Canada committed to maintaining low policy rates with a “conditional commitment” to keep the interest rate at 25 basis points until the end of the second quarter of 2010; expanded liquidity operations modestly and prepared a framework for quantitative and credit easing.

### Government fiscal actions and interaction with central banks
- G-7 governments provided guarantees of bank debt and deposits, decreasing bank reliance on wholesale funding.
- In some countries the government took leading roles in supporting credit markets (examples: Canada, U.K., Japan).
- Differing exposure to credit risk across central banks:
  - The Fed accumulated the largest portfolio of risky private-sector securities among major central banks; Fed losses, if any, expected to be borne by the government.
  - Bank of England’s asset purchases were formally indemnified by the Treasury.
  - ECB’s supranational nature may have contributed to reluctance to buy assets.

### Effectiveness of unconventional central bank policies (overview and caveats)
- Collective policy actions contributed to:
  - Reduction in systemic tail risks after Lehman Brothers.
  - Improvements in market confidence and risk appetite.
  - Bottoming out in G-7 economies.
- Limitations and risks:
  - Some policies more successful than others; central banks may need further actions if conditions regress.
  - Central bank interventions have limits in arresting global deleveraging and weakening aggregate demand.
  - IMF April 2009 GFSR highlighted need for cleansing banks’ balance sheets, restructuring, and recapitalization to support recovery.

### Transmission challenges and measurement caveats
- Gauging effectiveness is difficult due to complex transmission and concurrent fiscal and non-central-bank actions.
- Analysis focuses on observable effects on credit market interest rates, spreads, and volumes across broad credit, bank lending, interest rates, and targeted markets.

### Financial stress, liquidity, and bank lending channel
- Forceful monetary easing and virtually unlimited liquidity offers helped reduce extreme financial stress after Lehman Brothers.
- IMF financial stress indices (FSIs) for major advanced economies have all dropped, with some falling below pre-Lehman levels.
- Bank lending channel remains strained:
  - Central banks have limited role in meeting potential capital needs of banks and strengthening capacity for new lending.
  - Public and private capital raising has stabilized the banking system but insufficiently to fully support lending and recovery.
  - Bank lending to the private nonfinancial sector has decelerated rapidly in the Euro area and the United States, and turned negative in the United Kingdom.
  - Surveys indicate continued tightening of lending standards in many jurisdictions.

### Money market functioning, spreads, and volumes
- Central banks reduced term premiums and increased availability of short-term financing via record low policy rates and generous liquidity operations.
- LIBOR and LIBOR-OIS:
  - 3-month LIBOR rates and LIBOR-OIS spreads have fallen across many currencies.
  - The 3-month LIBOR-OIS spread for the U.S. dollar has fallen back to near pre-crisis levels recently.
  - LIBOR-OIS spreads remain wider than pre-crisis levels for some currencies like the euro and sterling.
- TAF and currency swaps:
  - TAF and currency swap arrangements helped enhance functioning of foreign exchange swap and forward markets.
  - At the height of the crisis, dollar funding rates implied by 3-month euro and sterling forward contracts were 6.6 percent and 7.4 percent, respectively; by mid-summer 2009, these rates had fallen to around 1 percent.
- Commercial paper:
  - CP rates are falling in advanced economies, aided by central bank purchases and liquidity operations.
  - Amount of CP outstanding in the United States has been contracting despite temporary increases following AMLF and CPFF announcements.
- Term repo and collateral:
  - Term repo rates have declined partly due to central bank operations.
  - Some central banks accepted a wider range of assets as collateral, freeing up high-quality collateral.
  - Repo volumes have fallen as the number of dealers declined and activities of securities lenders and some money market investors were curtailed.
- Money market contraction may have long-lasting effects on credit risk pricing, participant exit, and regulatory tightening.

### Effects on government and private yields, securitization, and corporate bond programs
- Yields on government bonds have increased in recent months despite sizeable purchases by some central banks.
  - Between March 18 and October 30, 2009, 5- and 10-year U.S. Treasury yields rose about 35 bps.
  - 5-year gilts increased 26 bps since March 4, 2009.
  - In Germany and Canada, 10-year yields rose about 9 and 44 bps, respectively, between March meetings and end-October 2009.
- Fed purchases of MBS and GSE obligations helped reduce mortgage rates and compress spreads between November 25, 2008 and late April 2009; conforming mortgage rates fell below 5.0 percent, triggering a large jump in refinancing activity.
- TALF outcomes:
  - Secondary market spreads on highly rated consumer ABS and CMBS narrowed considerably since TALF announcement and CMBS eligibility.
  - New issuance of consumer ABS has helped normalize; new CMBS issuance remains virtually nonexistent.
  - TALF funding for CMBS used primarily for legacy CMBS purchases.
- ECB covered-bond program:
  - Targeted €60 billion; ECB purchased €17 billion—28 percent of the intended amount—as of early October.

### Exit strategy: overarching principles and risks
- Current stance: accommodative given no clear signs of durable recovery and softening core inflation, but stimulus must be withdrawn once conditions normalize to avoid inflation and sustain the economy at potential.
- Central banks have adequate tools to control monetary conditions during exit, but clear and effective exit strategies are essential.
- Risks to manage:
  - Excess liquidity and large reserves could transform into rapid credit growth and lead to inflation, though muted by output gaps, shortage of bank capital, and tight lending standards.
  - Premature withdrawal could set back recovery; clear communication is imperative.

### Conceptual and operational issues for exit
- Key questions:
  - Whether pre-crisis balance sheet sizes provide a guide for appropriate size during exit and how fast balance sheets can contract without undermining recovery.
  - Whether central banks can control policy rates while balance sheets remain significantly larger than pre-crisis levels.
  - Whether certain actions will unwind automatically as financial conditions improve.
  - How best to prioritize asset sales without undermining economic recovery.
  - How to guard central banks against losses.
- Operational options for unwinding:
  - Holding some assets to maturity may be prudent, especially less liquid, longer-term assets (e.g., MBS and agency bonds) to avoid capital losses and not jeopardize recovery.
  - Tightening via liability management while balance sheets remain expanded:
    - Raise policy rates while reserves remain high.
    - Pay interest on reserves (the Fed) or use deposit facility (ECB) to discourage bank lending of excess reserves.
    - Use reverse repos, issue central bank bills, accept term deposits, or raise reserve requirements (noting constraints and political considerations).
  - Some short-term facilities can run off naturally as use declines; medium- and long-term purchases will likely unwind more slowly to avoid market disruption.

### Liability-side instruments to tighten monetary policy (instruments and constraints)
- Possible instruments to reduce excess reserves:
  - Raise reserve requirements on banks (may need large increases).
  - Accept term deposits from commercial banks.
  - Issue central bank bills (subject to authority and political consensus).
  - Conduct reverse repos to absorb liquidity.
- Fiscal authority can assist (e.g., issuing obligations and depositing proceeds at the central bank as in the U.S. Supplementary Financing Program), but political economy constraints may limit cooperation.
- Technical constraints:
  - Large-scale reverse repos may hit capacity limits of primary dealers; expanding counterparties can mitigate this (Fed planning reverse repo operations with money market mutual funds).

### Conclusion — key findings and implications
- Findings:
  - A major deflationary shock and financial market distress prompted G-7 central banks to cut policy rates to near zero and engage in unconventional monetary policy (commitment to low rates, expansion of liquidity provision, purchases of long-term government bonds, direct interventions in credit markets).
  - Scale and scope of unconventional measures differed substantially across major central banks; ECB led in liquidity operations while U.S. and U.K. saw the largest balance sheet expansions.
  - Central bank interventions, together with government actions, broadly stabilized financial conditions over time; tail risks declined dramatically and funding strains eased.
  - Purchases of government bonds appear to have had only temporary impact on treasury yields.
- Exit strategy considerations:
  - Extraordinary support will be needed for some time, but planning exit strategies is important.
  - Unwinding unconventional measures will be difficult and requires a sensible plan, skillful execution, and clear communication.
  - Many short-term facilities can be allowed to run off; unwinding holdings of long-term securities may disrupt markets.
  - Central banks possess tools to control monetary conditions even while balance sheets remain expanded.

*Source: IMF staff discussion in the provided document excerpt.*

### 1.      During the escalating stages of the current economic and financial crisis, advanced

### During the escalating stages of the current economic and financial crisis, advanced country central banks faced difficult choices.

### Context and initial conditions
- Stress first appeared in the financial system in the second half of 2007 and was initially perceived as limited to a few isolated markets; the main systemic concern was liquidity.
- Uncertainty about the size and distribution of losses on subprime mortgage securities raised concerns about counterparty risk and increased the price of and reduced the availability of interbank financing.
- Growth started to slow while inflation spiked, driven by a significant increase in commodity prices.

### Early conventional responses and divergence in policy rates
- Central banks increased the scale of liquidity-providing operations while attempting to control the macroeconomy by adjusting policy interest rates.
- Liquidity provision was largely sterilized via open-market operations, altering composition but not the size of balance sheets (Figure 1).
- Actions on policy rates diverged substantially during the first year of the crisis:
  - The U.S. Federal Reserve (Fed) cut its policy rate aggressively.
  - The European Central Bank (ECB) raised its main refinancing rate ¼ percentage point in July 2008 (Trichet, 2009b).
- Specific Fed adjustments:
  - "The target for the federal funds rate was reduced by 325 bps to 2 percent between September 2007 and April 2008."
  - "Also, the spread between the primary discount window rate and the policy rate was cut to 25 bps from the usual 100 bps within this time period."

### Crisis intensification after September 2008
- After the bankruptcy of Lehman Brothers and near-failures in September 2008:
  - Traditional tools proved insufficient to address collapse of aggregate demand and freezing of key credit markets.
  - Policy rates reached effective lower bounds and further cuts were insufficient because:
    - Size of the shock,
    - Offset from a drop in inflation expectations on real rates,
    - Disruptions in transmission from policy rates to private borrowing rates and the real economy.
- Financial intermediation materially weakened:
  - Capital adequacy of systemically important financial institutions was questioned.
  - Wholesale funding markets were under stress; commercial banks tightened lending standards considerably.
  - Nonbank financing, particularly via private-label securitization, virtually came to a halt.
  - Access to credit for households and businesses was severely curtailed and its cost rose.

### Fiscal and regulatory policy responses
- Policymakers took decisive measures to stabilize markets and institutions and to limit economic contraction:
  - Steps to guarantee bank liabilities.
  - Recapitalization of financial institutions.
  - Measures to limit portfolio losses.
  - Adoption of large fiscal stimulus packages to bolster aggregate demand.

### Unconventional monetary policy actions by central banks
- Central banks acted nimbly and adopted unconventional policies, including:
  - Dramatically increasing the size and scope of liquidity operations.
  - Providing direct support to credit markets to varying degrees.
  - Purchasing government bonds (by several central banks).
  - Growing the size of their balance sheets significantly.
  - Making conditional commitments to keep policy rates low for extended periods.
- This paper examines unconventional monetary policy actions undertaken by G-7 central banks and assesses effectiveness in alleviating financial market pressures and facilitating credit flows to the real economy.
  - Section II: menu of unconventional tools.
  - Section III: approaches by major advanced country central banks.
  - Section IV: effectiveness via impact on key financial market indicators.
  - Section V: issues relating to exit from large-scale interventions.
  - Section VI: concluding remarks.

### Options for unconventional monetary policy (four complementary means)
- When policy rates are close to the zero bound, central banks can provide additional stimulus through:
  - Explicit commitment to keep policy rates low until recovery takes hold.
  - Providing broad liquidity to financial institutions to enable on-lending.
  - Affecting long-term interest rates by purchasing treasury securities.
  - Direct interventions in specific credit market segments (loans to nonfinancial corporations, purchase of private assets, loans linked to acquisition of private-sector assets).

### Detailed mechanics and rationale for the four approaches
- Commitment to keeping short-term rates low:
  - Aims to anchor expectations and keep inflation expectations from declining, preventing a rise in real rates and bolstering demand.
  - Effectiveness depends on credibility and restricts future options.
- Extraordinary low-cost financing to financial institutions:
  - Can be implemented through existing or new facilities, lending at longer maturities, broadening eligible collateral, and expanding counterparties.
  - May not translate into more credit to households and firms if banks face capital constraints, are reducing balance sheet size/risk, or are risk averse.
- Purchases of longer-term government securities:
  - Aim to reduce long-term private borrowing rates because treasuries benchmark private asset pricing.
  - Banks may instead hold proceeds as reserves if profitable lending opportunities are limited.
  - Risks include limited impact if purchases are small relative to deep government bond markets and potential capital losses when yields rise.
- Credit market interventions:
  - Direct support to illiquid markets can reduce liquidity premiums, establish benchmark prices, and encourage origination.
  - Can require eligible securities as collateral with overcollateralization to protect the central bank.
  - Useful both near-zero and above-zero short-term nominal interest rates when dislocations threaten wider financial stability.
  - Present logistical challenges and expose central banks to greater credit risk and potential market distortions.

### Nomenclature and taxonomy (Box 1 summary)
- Terminology is inconsistent: quantitative easing (QE) vs. credit easing (CE) lack generally accepted definitions.
  - Bank of Japan (2001–2006): QE targeted amount of excess reserves, primarily by buying government securities.
  - Bernanke (2009): CE encompassed all Fed operations to extend credit or purchase securities; focus on composition of balance sheet rather than size.
  - Commentators later: QE often used for purchases of long-term government securities; CE for acquisition of private assets (agency bonds and mortgage-backed securities in a gray area).
  - Buiter (2008): QE expands monetary base; "qualitative easing" shifts composition toward less liquid/riskier assets while holding size constant.
  - Bank of Canada (2009): QE—purchase of government or private securities financed by creation of reserves; CE—acquisition of private assets in key markets. These are not mutually exclusive.
  - Bank of England distinctions: "conventional unconventional" (purchases of highly liquid assets to boost money supply) vs. "unconventional unconventional" (targeted asset purchases to improve liquidity in credit markets).
  - ECB labeled its approach "enhanced credit support," centering on ample liquidity provision; limited asset purchases to covered bonds but full-allotment auctions expanded balance sheet and excess reserves.

### Advantages and drawbacks of approaches (summary)
- Commitment to low rates:
  - Easy to announce, useful under high policy uncertainty, encourages long-term investment; effectiveness hinges on credibility and restricts future options.
- Increasing bank reserves via liquidity facilities:
  - Easily implemented, low credit risk to central bank, reduces run risk, self-unwinding and few exit problems; may not increase lending if banks are capital-constrained or risk averse.
- Purchasing long-term securities:
  - Familiar, minimal credit risk, signals desire to lower long-term rates; may have limited impact if purchases are small relative to market, may raise long-term rates if perceived as fiscal monetization, and exposes central bank to capital losses.
- Providing credit directly to end borrowers:
  - Potentially more effective when banks’ capacity/willingness to lend is impaired, signals aggressive policy; logistical challenges, greater credit risk, possible market distortions and uneven effects across credit segments.

### Measures taken by G-7 central banks (initial steps)
- Advanced country central banks:
  - Enhanced liquidity provision early in the crisis (Table 1).
  - Extended maturity of lending operations to alleviate stress in term markets.
  - Expanded eligible collateral lists for repurchase operations to address market fragmentation and shortage of high-quality collateral.
  - ECB emphasized enhanced liquidity provision, leveraging its existing broad counterparties and less restrictive collateral rules.
- Expanded access to lender-of-last-resort facilities as cross-border credit flows to foreign banks and the nonbank financial sector were curtailed.
- U.S. Fed innovations:
  - Created Term Auction Facility (TAF) with anonymous auction lending to depository institutions to mitigate discount window stigma.
  - Extended TAF to foreign banks through cooperation with other major central banks.
  - Entered reciprocal currency swap arrangements with other central banks to increase dollar funding availability outside the United States.
  - Introduced the Primary Dealer Credit Facility (PDCF) to give some investment banks access to lender-of-last-resort funding.
  - Introduced the Term Securities Lending Facility (TSLF) to increase supply of high-quality collateral like U.S. treasuries.

*Source: IMF staff discussion in the provided document excerpt.*

### Box 2 summarizes historical experience with unconventional monetary policy.

### Box 2 summarizes historical experience with unconventional monetary policy

### Japan: ZIRP and Quantitative Easing (1999–2006)
- BoJ introduced zero interest rate policy (ZIRP) in early 1999, committing to keep the interbank overnight rate at zero until “deflationary concerns are dispelled.”
- ZIRP was lifted in August 2000 after a brief recovery, but the overnight rate remained close to zero and BoJ took extraordinary measures.
- On March 19, 2001 the BoJ introduced a quantitative easing policy (QEP) and committed to keeping the policy rate at zero until “the core CPI registers stably a zero percent or an increase year on year.”
- QEP set an initial target on bank reserves at the BoJ at around 5 trillion yen and was subsequently increased to 30-35 trillion yen before terminating QEP on March 9, 2006.
- BoJ increased outright purchases of long-term Japanese government bonds and supported lending through special operations to facilitate corporate financing.
- After QEP ended, the BoJ:
  - Reduced the size of its balance sheet and excess reserves fairly quickly, though not all the way to late-1990s levels.
  - Curtailment of funds-supplying operations and gradual reduction of government securities holdings.
  - Began slowly to divest stocks acquired (on a fairly small scale), but the process was interrupted by the current crisis.
  - Raised the policy rate only marginally—to 50 basis points—over the year following termination of QEP.
- Evidence and interpretation:
  - Analysts disagree on whether unconventional policies improved overall economic performance; many emphasize failures to resolve undercapitalized banking system problems.
  - Evidence is more positive on effects on financial variables:
    - Commitment to low rates under ZIRP affected policy rate expectations (Okina and Shiratsuka (2004)).
    - QEP was effective in lowering the yield curve (Bernanke, Reinhart, and Sack (2004)).
    - Fed communication in 2003 influenced market expectations that accommodation would be maintained “for a considerable period.”

### U.S. Federal Reserve: Credit Easing and Targeted Facilities
- The Fed advanced on credit easing and employed a variety of unconventional measures on a large scale:
  - Purchases of government bonds and debt and mortgage-backed securities issued by U.S. government-sponsored enterprises (GSEs) to lower yields and encourage shifts to riskier assets.
  - Aimed at reducing long-term funding costs (especially residential mortgage rates) and increasing bank reserves.
  - Set up facilities to support the commercial paper market by buying paper directly from issuers or through money market mutual funds.
  - Term Asset-Backed Securities Loan Facility (TALF) to enhance liquidity and jump-start private-sector securitization.
- TALF specifics:
  - Operational since March 25.
  - Provides 3- and 5-year non-recourse loans to holders of eligible asset-backed securities (ABS).
  - Program authorized to lend up to $200 billion.
  - Eligible ABS include high-quality newly issued ABS backed by student, auto, credit card, small business, and commercial mortgage loans (CMBS).
  - Overcollateralization ranges from 5 to 16 percent, depending on collateral and maturity.
  - Interest rate generally set at 100 basis points above 1-month LIBOR for floating rate loans or above the 3-year LIBOR swap rate for fixed rate loans.
  - Fed’s balance sheet mitigates risk via overcollateralization and a $20 billion capital infusion from the Treasury.
  - TALF accepts legacy CMBS issued before January 1, 2009 to work with Treasury’s PPIP.
- Other Fed facilities:
  - Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF): non-recourse loans to banks to finance purchases of high-quality ABCP from MMMFs; banks face no credit risk and zero risk weighting.
  - Commercial Paper Funding Facility (CPFF): finances an SPV that purchases top-rated 3-month commercial paper directly from issuers; Treasury made a special deposit to reduce Fed credit risk.
  - Money Market Investor Funding Facility (MMIFF): designed to fund purchases of CDs, bank notes, and CP up to 90 days through private SPVs; required subordinated ABCP equal to 10% of the asset’s purchase price to limit Fed exposure; the facility expired on October 30, 2009 without being tapped as AMLF, CPFF, and FDIC guarantees sufficed.

### Bank of England and Bank of Japan: Large-Scale Government Bond Purchases and Limited Private Asset Purchases
- Bank of England (BoE):
  - Authorized by HM Treasury to purchase up to ₤150 billion of assets, including a maximum of ₤50 billion of private-sector assets, financed through issuance of central bank reserves.
  - Announced a 3-month Asset Purchase Program (APP) on March 5 to purchase ₤75 billion of assets (mostly medium and long-term gilts); subsequently extended and scaled up to currently ₤175 billion.
  - The ₤175 billion equals 41 percent of outstanding gilts in the relevant maturity range and nearly 80 percent of planned debt issuance in FY2009.
  - ₤50 billion credit easing component authorizes purchases of a broad range of high-quality private assets; net purchases to date around ₤1 billion each of commercial paper and corporate bonds.
- Bank of Japan (BoJ):
  - Focused largely on government bond purchases, scaling up outright purchases from ¥1.2 trillion per month (October 2002 level) to ¥1.4 trillion in December 2008 and then to ¥1.8 trillion per month starting in March.
  - At ¥1.8 trillion per month, annual purchases amount only to 2½ percent of the federal debt outstanding in early 2009 but close to 50 percent of the net bond issuance projected for 2009.
  - BoJ purchases of private securities limited:
    - Commercial paper holdings barely exceeding one percent of its balance sheet (compared to nearly 18 percent at its peak for the Fed).
    - Limit on commercial paper holdings: ¥3 trillion (under 3 percent of BoJ balance sheet, and 16 percent of Japan’s commercial paper market).
    - Corporate bond holdings negligible; limit set at ¥1 trillion.
    - October 2008 suspension of divestment of stocks acquired earlier; February 2009 start of purchasing stocks from financial institutions—program limited to ¥1 trillion.

### European Central Bank, Bank of Canada, and Cross-Country Differences
- European Central Bank (ECB):
  - Followed “enhanced credit support”: boosted liquidity facilities and expanded balance sheet but did not engage in outright government paper purchases.
  - Greatly expanded the range of acceptable collateral and the term of liquidity-providing operations.
  - Auctioned €442 billion of one-year funds at 1 percent in late June and another €75 billion in late September.
  - Initiated a €60 billion program to buy covered bonds over 12 months beginning July 2009.
  - Until recently had not supported credit markets directly but facilitated issuance of private securities by accepting them as collateral.
- Bank of Canada (BoC):
  - Committed to maintaining low policy rates until clear signs of recovery.
  - Made a “conditional commitment” to keep the interest rate at its effective low bound of 25 basis points until the end of the second quarter of 2010—an explicit end-date communication.
  - Expanded liquidity operations modestly and prepared a framework for quantitative and credit easing to be used if needed.
- Cross-country drivers of differing approaches:
  - Differences reflect country-specific circumstances: depth/timing of recessions, roles of banks vs. capital markets in credit allocation, severity of financial system problems, institutional flexibility, political structures, and nonmonetary authority actions.
  - ECB’s stronger early optimism led to emphasis on liquidity support for banks rather than rate cuts or quantitative easing.
  - Europe’s nonfinancial private sector reliance on banks justified focus on ensuring banks were strong and had resources to lend (Figure 3: banks dominate sources of external financing for corporations in the euro area).
  - Where bank transmission is impaired, credit easing (to bypass banks) can be warranted even in bank-based systems.

*Source: Box 2, “Past Experience with Unconventional Monetary Policy.”*

### 22.      Finally, the actions of the legislative and executive branches of government shape the

### _spn0927 - 22.      Finally, the actions of the legislative and executive branches of government shape the 

### Government fiscal actions and interaction with central banks
- G-7 governments have taken numerous actions to support financial institutions (Table 2).
- Guarantees of bank debt and deposits decreased bank reliance on wholesale funding such as through commercial paper and repurchase agreements.
- In certain countries the government has taken a leading role in providing support to credit markets, reducing the need for central bank operations:
  - Canada: government purchasing insured mortgage pools from financial institutions, and term asset-backed securities.
  - U.K.: government leading effort to restart residential mortgage securitization through its guarantee program.
  - Japan: Development Bank of Japan has started outright purchases of commercial paper.
- Differing exposure to credit risk across central banks:
  - The Fed has accumulated the largest portfolio of risky private-sector securities among major central banks, with the understanding (initially implicit, now partly formalized in CPFF and TALF setup and in a joint Fed–Treasury statement) that ultimately the Fed’s losses, if any, will be borne by the government.
  - In the U.K., the Bank of England’s asset purchases were authorized in a formal exchange of letters between the Governor and the Chancellor; the Bank is explicitly indemnified by the Treasury from any losses arising from these purchases.
  - The supranational nature of the European Central Bank may have contributed to its reluctance to buy assets.
- The Fed’s loss protections include focus on purchasing highly rated securities, overcollateralization, and the government's support for the GSEs.

### Effectiveness of unconventional central bank policies (overview)
- Collective policy actions by major advanced country central banks contributed to:
  - Reduction in systemic tail risks following the bankruptcy of Lehman Brothers.
  - Recent improvements in market confidence and risk appetite.
  - Bottoming out in G-7 economies.
- Limitations and risks:
  - Some policies are proving more successful than others; central banks may need further actions if market conditions regress.
  - Central bank interventions have limits in arresting global deleveraging and weakening aggregate demand.
  - Continued and potentially further public interventions may be needed to address on-going credit constraints.
- IMF April 2009 GFSR highlighted: “without a thorough cleansing of banks’ balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks’ problems are likely to keep the credit capacity of the financial systemic too low to support the economic recovery” (p. XV).

### Transmission challenges and measurement caveats
- Gauging effectiveness is difficult because transmission to the economy is complex and opaque.
- Multiple factors influence market conditions; isolating impacts of individual policies is especially difficult given concurrent fiscal and non-central-bank financial policy actions.
- Counterfactuals (what would have happened absent central bank action) are hard to determine given low market confidence since the crisis began.
- Analysis focuses on observable effects on credit conditions: credit market interest rates, spreads, and volumes across broad credit, bank lending, interest rates, and targeted markets.

### Financial stress, liquidity, and bank lending channel
- Forceful monetary easing and virtually unlimited liquidity offers by major central banks helped reduce extreme financial stress after Lehman Brothers.
- Some authorities (Federal Reserve, Swiss National Bank) directly participated in rescue efforts for specific large, highly interconnected financial institutions.
- IMF financial stress indices (FSIs) for major advanced economies have all dropped, with some falling below pre-Lehman levels.
- Broad measures of financial conditions improved partly due to significant drop in real short-term rates, but conditions remain tight relative to pre-crisis levels—especially in regions where higher real effective exchange rates and lower equity market capitalization (Europe and Japan) offset interest rate declines.
- Bank lending channel remains strained:
  - Central banks have limited role in meeting potential capital needs of banks and strengthening capacity for new lending.
  - Public and private capital raising has primarily stabilized the banking system; not enough capital has been raised to adequately support lending and economic recovery.
  - Bank lending to the private nonfinancial sector has decelerated rapidly in the Euro area and the United States, and turned negative in the United Kingdom.
  - Total lending decline also looks dramatic.
  - Were it not for official interventions, credit flows would likely have fallen much more—beyond comparison with any other postwar recession—given the magnitude of the shock.
  - Surveys from the ECB and the Fed indicate banks are still tightening lending standards to households and nonfinancial firms, albeit not as vigorously as at the peak of the crisis.
  - In the United Kingdom, standards for corporate lending loosened slightly in the first half of 2009 but remain tight; in Japan lending standards have largely remained on the pre-crisis trajectory of moderating loosening, with standards for large corporations reaching the neutral point.

### Money market functioning, spreads, and volumes
- Central banks have reduced term premiums in money market rates and increased availability of short-term financing via record low policy rates and generous liquidity operations.
- Use of central bank liquidity facilities has generally been falling lately.
- LIBOR and LIBOR-OIS developments:
  - LIBOR rates on maturities of 3 months or more have dropped across a number of currencies, and so have their spreads over implied overnight rates derived from overnight index swaps (OIS).
  - The 3-month LIBOR-OIS spread for the U.S. dollar has fallen back to near pre-crisis levels more recently.
  - LIBOR-OIS spreads still remain wider than pre-crisis levels for some currencies like the euro and sterling.
  - Operations reduced liquidity risk premiums but had less impact on counterparty credit risk premiums: LIBOR-OIS spreads declined more than bank CDS spreads.
- Credit risk premiums remain high due to perceptions of unresolved troubled asset issues and rising unemployment; longer-lasting increase in price of credit risk in uncollateralized money market rates is possible.
- Term Auction Facility (TAF) and currency swap arrangements:
  - TAF and currency swap arrangements between the Fed and 14 central banks helped enhance functioning of foreign exchange swap and forward markets.
  - At the height of the crisis, dollar funding rates implied by 3-month euro and sterling forward contracts were 6.6 percent and 7.4 percent, respectively. By mid-summer 2009, these rates had fallen to around 1 percent.
- Commercial paper (CP):
  - CP rates are falling in advanced economies, driven in part by direct purchases and liquidity operations by the Fed, BoE, and BoJ targeted at short-term corporate financing.
  - Both highest and lower tiers of CP rates are falling, although a wide positive spread between higher and lower tiers remains.
  - In the United States, the amount of CP outstanding has been contracting despite temporary increases following AMLF and CPFF announcements; decline reflects fall in demand for CP funding as banks have alternative funding via government guaranteed debt, non-guaranteed note issuance to a lesser extent, and increased deposits.
  - Fed facilities buttressed the CP market at the crucial time, allowing rate reductions, maturities extensions, and supporting volume.
- Term repo and collateral:
  - Term repurchase (repo) rates have declined in G-7 countries partly due to central bank operations (e.g., BoE’s Special Liquidity Scheme, Fed’s Term Securities Lending Facility).
  - Some central banks (particularly the ECB) accepted a wider range of assets to pledge at auctions, freeing up high-quality collateral.
  - Despite lower repo rates, volumes have fallen over the crisis as the number of dealers declined and activity of securities lenders and some money market investors was curtailed.
- Money market complex contraction and longer-term effects:
  - Progress on money market volumes is mixed; some segments still show significant drops in outstanding amounts.
  - Crisis shock led to potentially long-lasting repricing of credit risk in money market rates, exit and significant reduction in activity of a number of money market players, and likely tightening of regulations governing bank liquidity management and money market mutual fund investments.
  - Ongoing deleveraging by financial firms likely to reduce demand for funding.
  - Very low money market rates show early signs of reduced demand for money market investments.
  - Combined factors have led to broad-based shrinkage in money market activity and capacity, some of which is likely to persist for a long period of time.

*IMF staff analysis as presented in the source document*

### 31.      Central bank operations directed at longer-term fixed income markets, including

### _spn0927 - 31.      Central bank operations directed at longer-term fixed income markets, including

### Effects on government and private yields
- Yields on government bonds have increased over the last several months despite sizeable purchases by a few major central banks.
- The spreads between private asset yields and treasuries have declined in both markets with major central bank support (e.g., U.S. conforming mortgage market) and those with limited support (e.g., corporate bonds), suggesting part of the compression in credit spreads since Q1 2009 may reflect a broad-based fall in investor risk aversion rather than any single policy intervention.
- Between the announcement date on March 18 and October 30, 2009, 5- and 10-year U.S. Treasury yields rose about 35 bps.
- 5-year gilts increased 26 bps since March 4, 2009, due in part to the BoE’s announcement that it would suspend its purchases of 5- and 12-year bonds as of late June.
- In Germany and Canada, 10-year yields rose about 9 and 44 bps, respectively, between the ECB’s and BoC’s March monetary policy meetings and the end of October 2009.

### Impact of central bank purchases and liquidity provision
- Improving views about the global economic outlook, reduced concerns about deflation, and anxiety about increased government supply to finance anti-crisis efforts are counteracting the yield impact of quantitative easing by the Fed, BoE, and BoJ.
- Augmented liquidity provision may affect government bond yields: Čihak, Harjes, and Stavrev (2009) find the actual spread between longer-term and short-term interest rates in the euro area has been lower than predicted and attribute that deviation to enhanced credit support provided by the ECB (other explanations cannot be ruled out).
- The Fed’s purchases of MBS and direct obligations of the U.S. GSEs helped to:
  - reduce mortgage rates and compress their spreads over U.S. Treasuries between November 25, 2008 and late April 2009;
  - leave both 30-year agency conforming mortgage rates and those on non-conforming jumbo loans below levels observed before the Fed announced its purchase program, with jumbo yields declining more.
- Conforming mortgage rates fell below 5.0 percent, triggering a large jump in refinancing activity, which has since slowed.
- Since November 2008 there has been very little private buying interest in agency MBS, leaving the Fed to purchase a significant share of new issuance.

### Corporate bond programs and central bank roles
- Corporate bond purchases by the BoE and BoJ have been small relative to their balance sheets and market size.
  - The BoE uses its program primarily as a backstop to potential dislocations in the U.K. corporate bond market; its purchases have contributed to a marginal narrowing of U.K. corporate bond spreads.
  - Market participants suggest the corporate bond portion of the BoE asset purchase program may no longer be necessary given broader investor interest in corporate bonds globally.
  - The BoJ focuses purchases on bonds with up to one year in maturity to enhance corporate funding conditions, not to lower longer-term corporate bond yields or credit premiums.

### Securitization markets and TALF outcomes
- Resuscitating securitization markets through the Fed’s TALF has been challenging.
  - Secondary market spreads on highly rated consumer ABS and CMBS, and to a lesser extent mortgage-related ABS, have narrowed considerably since the TALF announcement and CMBS eligibility.
  - Traditional buyer capacity for consumer ABS and CMBS has diminished over the crisis; the Fed is enticing remaining players with very high expected returns on their capital.
  - The Fed’s efforts have helped new issuance of consumer ABS to normalize, but new CMBS issuance remains virtually nonexistent.
  - TALF funding for CMBS has been used primarily for purchase of legacy CMBS, rather than newly originated securities.
  - There is no Fed support for new issuance of private label residential MBS; the U.S. Treasury’s Private-Public Investment Program targets legacy securities held by banks.

### European securitization and covered bonds
- Securitization markets in Europe remain under pressure despite wider collateral acceptance and longer terms from ECB and BoE liquidity operations.
  - Secondary market spreads in U.K. and European ABS and residential MBS trended upward until H1 2009 amid collateral credit deterioration concerns; spreads improved significantly after the ECB extended the term of its fixed rate, full allotment liquidity operations to one year.
  - Total primary issuance volumes in 2008 and 2009 did not materially decline because a significant amount of new issues were retained by issuers as collateral for central bank funding; market participants estimate 98 percent of new issues were retained by issuers for all of 2008.
  - A few banks have more recently begun to issue privately distributed ABS.
- The ECB’s covered-bond purchase program:
  - targeted €60 billion of European covered bonds;
  - led to narrower credit spreads and higher issuance volumes;
  - the ECB purchased €17 billion—28 percent of the intended amount—in covered bonds in both the primary and secondary markets as of early October.

### Exit strategy: overarching principles and risks
- Current stance: monetary policy in large advanced economies is justifiably accommodative given no clear signs of durable recovery and softening core inflation, but stimulus must be withdrawn once conditions normalize to avoid inflation and sustain the economy at potential.
- Central banks have adequate tools to control monetary conditions during exit, but clear and effective exit strategies are essential to unwind unconventional measures and return to overnight interest-rate management.
- Risks to manage:
  - Excess liquidity and large reserves could transform into rapid credit growth and lead to inflation if not managed, though this risk is muted currently by large output gaps, shortage of bank capital, and tightened lending standards.
  - Premature withdrawal of support could set back recovery; clear communication of exit strategies is imperative.

### Conceptual issues for exits (as framed in the source)
- Whether pre-crisis balance sheet sizes provide a guide for appropriate size during exit and how fast balance sheets can contract without undermining recovery or allowing inflation to accelerate.
- Whether central banks can control policy rates while balance sheets remain significantly larger than pre-crisis levels.
- Whether certain central bank actions will unwind automatically as financial conditions improve.
- Whether monetary policy can be tightened via substitution on the liability side rather than by contracting balance sheets.
- If balance sheets need to contract, how best to prioritize asset sales without undermining economic recovery.
- How to guard central banks against losses.

### Operational options and considerations for unwinding
- Holding some assets to maturity may be prudent, even if it implies expanded balance sheets for an extended period, to avoid capital losses and not jeopardize economic recovery—especially for less liquid, longer-term assets (e.g., MBS and agency bonds) where central banks may dominate the market.
- Central banks can tighten policy through liability management even with expanded balance sheets:
  - They can raise policy rates while reserves remain high; above-zero policy rates can coexist with expanded balance sheets.
  - They can use tools such as paying interest on reserves (the Fed) or the ECB’s deposit facility to discourage banks from lending excess reserves in the overnight market and thereby keep the interbank overnight lending rate in a tight range.
  - Limits to arbitrage (e.g., not all institutions can hold deposits at the Fed or be remunerated) may constrain the deposit rate as a hard floor on the overnight rate.
- Short-term credit operations have begun unwinding naturally as market conditions normalize because central bank lending facilities typically provide liquidity at a premium or with high haircuts; examples include reductions in recourse to the discount window, shrinkage of currency swaps, and reduced use of TAF, TSLF, PDCF.
- Medium- and long-term asset purchases will likely unwind more slowly:
  - Selling these securities could have significant market impact; small sales in the MBS market could widen spreads and undermine housing market recovery.
  - Central banks may choose to hold such assets to maturity to avoid capital losses and preserve recovery.

_Italic: Source: _spn0927 - 31. Central bank operations directed at longer-term fixed income markets, including — IMF PDF chapter content provided above._

### 40.      In addition to mopping up liquidity through a contraction of central bank balance

### _spn0927 - 40.      In addition to mopping up liquidity through a contraction of central bank balance

### Liability-side instruments to tighten monetary policy

- Central banks can tighten policy by substitution on the liability side rather than only contracting balance sheets.
- Possible instruments to reduce excess reserves:
  - Raise reserve requirements on banks (noting the requirement would likely have to be raised quite dramatically to make a serious dent).
  - Accept term deposits from commercial banks.
  - Issue central bank bills (subject to authority and political consensus where such authority does not exist).
  - Conduct reverse repos to absorb liquidity.
- Fiscal authorities can assist by issuing financial obligations that draw liquidity from the banking system and depositing proceeds at the central bank, as in the U.S. Supplementary Financing Program; however, Treasury cooperation may be limited by political economy considerations because such actions would be seen as increasing gross government debt.
- Constraints and caveats:
  - Political consensus is required to allow central banks to issue their own bills where they do not already have such authority.
  - Central bank bills, while absorbing reserves, could put an asset in banks' hands that can be used as collateral to draw more liquidity, including from the central bank.
  - Reverse repos are standard operations to absorb liquidity but conducting them on a massive scale may run into technical constraints (for example, limited balance sheet capacity of primary dealers).
  - Technical constraints on large-scale reverse repos could be mitigated by expanding the list of counterparties (example noted: the Fed planning reverse repo operations with money market mutual funds).

### VI. CONCLUSION — key findings and implications

- Findings on central bank responses to the shock:
  - A combination of a major deflationary shock and financial market distress prompted G-7 central banks to cut policy rates to near zero and engage in unconventional monetary policy.
  - Unconventional measures included commitment to keeping interest rates low for an extended period of time, dramatic expansion of liquidity provision, purchases of long-term government bonds, and direct intervention in key credit markets.
- Cross-country differences:
  - The scale and scope of unconventional measures differed substantially across major central banks.
  - Most central banks significantly boosted liquidity operations; the ECB led in size, maturity, and collateral and counterparty eligibility.
  - Massive asset purchases expanded central bank balance sheets most in the United States and the United Kingdom.
  - The Bank of England relied primarily on purchases of government bonds; the Fed acquired a variety of assets, including commercial paper and mortgage-backed securities and provided financing for acquisition of other asset-backed securities.
  - Reasons for diversity included differences in institutional arrangements, role of the banking system, degree of distress in financial markets, and assessments of economic prospects.
- Assessment of effectiveness:
  - Central bank interventions, together with government actions, broadly stabilized financial conditions over time.
  - While stress indicators remained at elevated levels, tail risks declined dramatically and funding strains eased.
  - Ample liquidity provision helped avoid a meltdown in the financial system.
  - Direct support of credit flows to borrowers and investors in disrupted markets and indirect support via broadening collateral eligibility appear to have been successful in alleviating pressure and propping demand.
  - Purchases of government bonds appear to have had only temporary impact on treasury yields.
- Exit strategy considerations:
  - Although extraordinary support will be needed for some time, planning exit strategies is already important.
  - Unwinding unconventional measures will be difficult and requires a sensible plan, skillful execution, and clear communication.
  - Many short-term facilities can be allowed (and have already started) to run their course when market conditions normalize.
  - Unwinding holdings of long-term securities may disrupt markets.
  - Central banks have effective tools for controlling monetary conditions even while their balance sheets remain expanded.

*Source: Excerpt from IMF staff discussion on liability-side tightening, constraints, and conclusions (sections 40–44).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0927.pdf_