A thoughtful speech from Benoît Cœuré, member of ECB.
He says when we say about QE in EZ, we have to look at interest rates across three spectrums:
Focusing specifically – and at the risk of over-simplifying the issue – on the interest rate channel of monetary transmission, monetary policy operates by raising or lowering the interest rate in the economy. A lower (real) interest rate lowers the cost of capital for firms, encourages investment spending and stimulates consumption. A higher real interest rate has the opposite effect.
But the point of course is that there is no such thing as one interest rate to which all economic agents respond. There are at least three ways in which interest rates are differentiated in the euro area. There is vertical differentiation – different economic agents are sensitive to interest rates with different maturities. There is spatial differentiation – different interest rate curves provide the reference rates in different jurisdictions. And there is horizontal differentiation – within jurisdictions, different markets determine firms’ and households’ cost of borrowing.
What this implies is that the levels of medium- and long-term real interest rates across jurisdictions and markets will always be relevant to the formulation of monetary policy. The difference between normal and abnormal times is therefore not what we are trying to achieve – it is how we strive to achieve it.
He further explains these three kinds of differentiation:
First, vertical differentiation – the relevant maturities at which asset purchases should take place. In practice, purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve.
Second, spatial differentiation – the jurisdictions across which asset purchases should be spread. Here we would have to take into account the interest rates in different jurisdictions that provide the benchmarks for loan pricing. In the euro area, remember, there is no single yield curve that refers to a “commoditised” reference asset and that is equally relevant for loans to firms and households. Creating such an asset would ease the implementation of our monetary policy, but this cannot be a short term project.
Third, horizontal differentiation – the markets within jurisdictions that asset purchases should target. When financial markets are highly integrated with a high degree of substitutability between assets, purchases in one asset class, such as government bonds, are more likely to affect term premia across all asset classes. This is because the process of portfolio reallocation facilitates a relatively homogenous transmission. But given the segmentation of euro area financial markets, this effect cannot just be assumed. To achieve a homogenous reduction of term premia across relevant interest rates, segmentation would have to be taken into consideration in our strategy.
Pretty complicated as most things in EZ are. One has to decide on maturities, countries and then within countries..
He says unconv policies are not as unconv and there is a wonderful quote at the end:
Unconventional monetary policy tools are less unconventional than the word implies. They are unusual, because they respond to highly unusual circumstances. They imply risks that have to be carefully weighed and mitigated. But fundamentally, unconventional tools are only a means for central banks to continue doing what they have always done: managing aggregate demand, by influencing the level of real interest rates and other monetary transmission channels, to maintain price stability. To borrow from Giuseppe Tomasi di Lampedusa, in these unusual times “everything must change, so that everything stays the same”. It is this that will determine both the appropriateness of using targeted asset purchases in our monetary policy operations, and the design of any such purchases.