| Author (Corporate) | European Parliament: European Parliamentary Research Service |
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| Publisher | EU |
| Series Title | In-Depth Analysis |
| Series Details | September 2018 |
| Publication Date | September 2018 |
| ISBN | 978-92-846-3834-5 |
| Content Type | Report |
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Communications about plans for future monetary policy were one of the key tools through which central banks could affect the economy. The addition of non-standard policies such as quantitative easing had complicated communication for central banks and there had been some lessons for the European Central Bank (ECB) to learn from communications mistakes made by other central banks in recent years. The ECB had so far done well in handling the communications issues relating to the ending of its Asset Purchase Programme but it faced a number of communications challenges as it sought to normalise monetary policy. This document was provided for the Economic and Monetary Affairs Committee of the European Parliament. Further related In-Depth Analyses + Central Bank Communication during Normal and Crisis Times Central banks have intensified their communication strategy since the mid 1990’s and it has become an important instrument of central banks’ policymaking toolkit. A large empirical evidence suggests that central bank communication has effectively enhanced the transmission of monetary policy before and during the financial crisis. Nevertheless, the use of communication as a policy instrument is fragile since it depends on economic agents’ perceptions and beliefs. It is crucial that central bank communication be consistent with policy decisions. + Negative Interest Rates and the Signalling Channel While negative interest rates stimulate the real economy by enhancing credit supply and improving the wealth situation of firms and households, they might come with side effects with regard to banking and financial stability. In an assessment of the trade-off between the ability of a central bank to use negative policy rates to signal lower future deposits rates, against the potential costs on bank profitability, we find that the signalling effect dominates. Thus, a negative interest rate policy is an effective monetary policy tool, even when deposit rates are bound by zero. + When Communication becomes the Policy Non-standard policy measures are intended to work via financial markets. Their effectiveness thus depends on how ECB communication affects the expectations of market participants far into the future. Communication has become as important as the details of the policy measures itself. The success of communication is often measured by short term market reactions, increasingly using advanced statistical techniques to interpret them. But this ‘policy making by the markets’ lacks a strong anchor because financial markets often anticipate policy and the assessments of investors change all the time, often independently of monetary policy actions. + Central Bank Communication at Times of Non-Standard Monetary Policies Communication is an important monetary policy tool, as central banks can use it to manage the expectations of economic agents. Communication becomes even more important in times of non-standard monetary policies due to increased levels of uncertainty and the introduction of new policy tools. In this paper, we summarise the literature on central bank communication in times of non-standard monetary policies, with a particular focus on forward guidance. + Post-crisis Excess Liquidity and Bank Lending With the Asset Purchase Program, the European Central Bank has supplied significant amounts of liquidity into the financial system starting from 2015, resulting yet into a new upswing in excess liquidity. The expanded asset purchase programme (APP) program broadly coincided with further cuts in the ECB’s deposit facility rate, which currently stands at -0.4%. Against this background, this note assesses the ECB policy of negative rate on the deposit facility and discusses the associated risks in the context of an excess liquidity overhang for the euro area, including risk-appetite for banks. |
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| Source Link | Link to Main Source http://dx.publications.europa.eu/10.2861/223717 |
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| Subject Categories | Economic and Financial Affairs |
| Countries / Regions | Europe |
