The Federal Reserve's Toolkit: Effectiveness of Unconventional Monetary Policy Measures
RIIHIMÄKI, MIIKKA (2012)
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RIIHIMÄKI, MIIKKA
2012
Kansantaloustiede - Economics
Johtamiskorkeakoulu - School of Management
Hyväksymispäivämäärä
2012-01-27Tiivistelmä
In the aftermath of the global financial crisis many major central banks faced the limits of conducting monetary policy with the traditional instruments as the short-term interest rate were driven to zero or close to it. For instance, in the United States, the Federal Reserve was compelled to adopt so called unconventional monetary policy tools in order to stimulate growth and aggregate demand in economy. The purpose of this paper is to provide a casual analysis of the Federal Reserve’s unconventional measures in the past three years and examine the effectiveness of them.
In the theoretical part of the thesis I will first present the Federal Reserve’s conventional monetary policy tools and describe how they affect the economy via different transmission channels. These channels, however, may become ineffective in certain crisis situations and the central bank is obliged to turn to unconventional measures. These are usually catalogued into three groups, according to whether they affect interest rates, the size of the Federal Reserve’s balance sheet, or the allocation of its credit across different assets. In conjunction to the implementation of these three unconventional policy measures, reversing these policies is equally essential. Therefore, I also pay close attention to the Federal Reserve’s exit strategy as well.
The empirical part of this study describes the Japanese case during the period of 1999–2006 which provides data on the experience of monetary policy at zero interest rates. I compare findings of those studies to the recent experience in the United States and draw out some conclusions what we have learned from the current crisis. Even though this subject has attracted substantial attention by economists and the theoretical literature on unconventional monetary policy has been prosperous over the past 20 years, empirical analysis of the impacts has been much more limited.
Asiasanat:unconventional monetary policy, quantitative easing, credit easing
In the theoretical part of the thesis I will first present the Federal Reserve’s conventional monetary policy tools and describe how they affect the economy via different transmission channels. These channels, however, may become ineffective in certain crisis situations and the central bank is obliged to turn to unconventional measures. These are usually catalogued into three groups, according to whether they affect interest rates, the size of the Federal Reserve’s balance sheet, or the allocation of its credit across different assets. In conjunction to the implementation of these three unconventional policy measures, reversing these policies is equally essential. Therefore, I also pay close attention to the Federal Reserve’s exit strategy as well.
The empirical part of this study describes the Japanese case during the period of 1999–2006 which provides data on the experience of monetary policy at zero interest rates. I compare findings of those studies to the recent experience in the United States and draw out some conclusions what we have learned from the current crisis. Even though this subject has attracted substantial attention by economists and the theoretical literature on unconventional monetary policy has been prosperous over the past 20 years, empirical analysis of the impacts has been much more limited.
Asiasanat:unconventional monetary policy, quantitative easing, credit easing