Unconventional Monetary Policy in Theory and in Practice

40 Pages Posted: 5 Feb 2012

Date Written: September 14, 2011

Abstract

In this paper, after discussing the theoretical underpinnings of unconventional monetary policy measures, we review the existing empirical evidence on their effectiveness, focusing on those adopted by the European Central Bank and by the Federal Reserve. These measures operate in two ways: through the signalling channel and through the portfolio-balance channel. In the former, the central bank can use communication to steer interest rates and to restore confidence in the financial markets; the latter hinges on the hypothesis of imperfect substitutability of assets and liabilities in the balance sheet of the private sector and postulates that the central bank’s asset purchases and liquidity provision lower financial yields and improve funding conditions. The review of the empirical literature suggests that the unconventional measures were effective and that their impact on the economy was sizeable. However, a very large degree of uncertainty surrounds the precise quantification of these effects.

Keywords: Central bank, unconventional monetary policy, financial crisis, signalling channel, portfolio balance channel

JEL Classification: E52, E58

Suggested Citation

Cecioni, Martina and Ferrero, Giuseppe and Secchi, Alessandro, Unconventional Monetary Policy in Theory and in Practice (September 14, 2011). Bank of Italy Occasional Paper No. 102, Available at SSRN: https://ssrn.com/abstract=1998755 or http://dx.doi.org/10.2139/ssrn.1998755

Martina Cecioni

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giuseppe Ferrero

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Secchi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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