Evangelos Benos & Gary Harper.
Since QE began, banks have had a lot more liquidity to make payments. But some have argued (in a nutshell) that banks are reliant on this extra liquidity to make their CHAPS payments and it would be difficult to remove it from the system. Our analysis shows that banks don’t need a great deal of liquidity to make their payments simply because they recycle such a high proportion of them. In practical terms, banks do not rely on high reserves balances to make their CHAPS payments so unwinding QE shouldn’t have any impact on banks’ ability to do just that. We also briefly go over the potential reasons for this such as the CHAPS throughput rules, the Liquidity Savings Mechanism, and the tiered structure of CHAPS.
Menno Middeldorp and Oliver Wood.
When the ECB announced an extension of its asset purchase programme on December 3 2015, the euro appreciated, bond yields rose and equity prices fell. This does not mean that the extension tightened monetary policy, but merely that it was smaller than what markets had priced in. In order to calculate the full impact of the programme on asset prices, we need to measure both the anticipation effect and announcement effect and add the two up. Our analysis suggests that the announcement effect undid about half of the anticipation effect, and so the extension of asset purchases still pushed down yields, supported equity valuations and depreciated the euro. However, compared to the initial programme, its impact on asset prices was smaller.
Author: Fergus Cumming.
When Friedman famously conjured up images of banknotes fluttering from helicopters in 1969, perhaps he knew he was about to inspire decades of sky-bound puns and policies in the name of deflation avoidance. Helicopter money goes beyond standard fiscal and monetary policy by boosting economic activity using money created by the central bank – money that does not have to be paid back. To its modern advocates, the tale is one of blue-sky thinking that could avert the next recession. But is this just pie in the sky? This post discusses why such a policy is different to quantitative easing, why it is unlikely to have much impact relative to conventional fiscal measures and the pitfalls associated with pursuing it.