Manmohan Singh and Haobing Wang
In this research summary, we highlight two policy implications from central bank balance sheet policies: (a) assets held due to quantitative easing are not the same as “reserves” (or deposits of the banking system at the central bank), and (b) conventional interest-rate policy and balance sheet adjustments consist of two independent dimensions of monetary policy and they differ in their respective financial spillovers to emerging markets.
Short-term policy rates in many advanced economies (AEs) have remained persistently low since the aftermath of the recent financial crisis. In an effort to manage sluggish economic recoveries and reinvigorate growth, several leading central banks (e.g., the Federal Reserve in the United States, the Bank of England, the European Central Bank, and the Bank of Japan) have carried out several rounds of quantitative easing (QE) to provide further monetary stimulus.
While the empirical evidence for the financial spillovers of QE is well documented, the economic explanation of its international transmission remains relatively obscure. The February meeting minutes of the Federal Open Market Committee (released March 2017) mentioned “that a change to the Committee’s reinvestment policy would likely be appropriate later this year”—i.e., the Fed’s balance sheet will unwind. Brainard (2017) suggests that cross-border spillovers will have important implications if policy rate hikes and balance sheet reductions are not equivalent.
Bindseil, Ulrich, 2016, “Evaluating Monetary Policy Operational Frameworks” Jackson Hole Economic Policy Symposium, Kansas Fed, August.
Brainard, Lael, 2017, “Cross-Border Spillovers of Balance Sheet Normalization,” Speech at NBER’s Monetary Economics Summer Institute, New York, NY, July 13, 2017.
Singh, Manmohan, 2017, “Why Shrinking the Fed Balance Sheet May Have an Easing Effect,” Financial Times, Alphaville, April 24. https://ftalphaville.ft.com/2017/04/24/2187716/guest-post-why-shrinking-the-fed-balance-sheet-may-have-an-easing-effect/
Singh, Manmohan, and Haobing Wang, 2017, “Central Bank Balance Sheet Policies and Spillovers to Emerging Markets,” IMF Working Paper 17/172. International Monetary Fund, Washington, DC.