What to expect when they’re expecting

Maren Froemel, Mike Joyce and Iryna Kaminska

Introduction

During 2020 the MPC announced a further £450 billion of QE purchases, slightly more than the total amount of assets purchased over the preceding ten years, taking the target QE stock to £875 billion of gilt holdings and £20 billion of sterling investment-grade corporate bonds. We study the high-frequency reaction of gilt markets to these QE announcements in light of the surprises to market expectations of the future QE path. We find the yield reactions to be broadly consistent with news about the expected medium-term stock of QE. This is in line with recent commentary, which has focused on the ‘pace of purchases’, as a faster/slower pace translated into a larger/lower stock of expected purchases, and could capture the effects of the local supply channel. The reaction to news about purchase pace could also be potentially consistent with an impact on expected liquidity premia or expected policy rates.

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Why Unconventional Monetary Policy Works in Theory

Roger Farmer and Pawel Zabczyk.

Monetary Policy signpost

In a discussion at the Brookings Institution, Ben Bernanke quipped that ‘the problem with Quantitative Easing is that it works in practice, but it doesn’t work in theory’.  Bernanke was referring to Wallace Neutrality – a famous result from monetary theory which asserts that the size and composition of the central bank balance sheet has no effect on inflation or employment. In a new working paper we bridge the gap between practice and theory, and we show how, by intervening in asset markets, a central bank can influence both.  In our model, that intervention will unambiguously improve economic outcomes. In essence, central banks can use open market operations and trades in risky assets to insure those unable to insure themselves.

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