Archive for June 29th, 2009

A primer on quantitative easing

June 29, 2009

Bank of England Economists have written a nice primer on quantitative easing. It explains how it impacts markets and effects various players. It also points to a short review of  empirical work on QE:

Quantitative easing has been used on few occasions in the past, so there is little empirical evidence on which to draw. One obvious international example is the experience of Japan earlier this decade. Bernanke et al (2004) found some evidence of an impact on long-term  interest rates from quantitative easing. However, Baba et al (2005) concluded that the Bank of Japan’s commitment to keep policy rates low was more important for reducing long-term interest rates than its use of quantitative easing. Asset purchases have also been used to influence government bond yields in the United States in the past. Bernanke (2002) highlighted that the Federal Reserve was successful in maintaining a ceiling onlong-term Treasury bond yields in the 1940s.

Recent announcements of asset purchases by central banks provide further evidence that such purchases can influence asset prices. Kohn (2009) highlighted that the Federal Reserve’s announcements of purchases of mortgage-backed securities and Treasury bonds reduced mortgage and other long-term rates in the United States appreciably — by some estimates by as much as a percentage point. And the Bank of England’s announcement on 5 March that the Bank would be purchasing £75 billion of assets financed by central bank money also appeared to have an impact on UK government bond yields. Gilt yields in the 5 to 25 year maturity range eligible for purchase fell around 40–90 basis points by the end of the day following the announcement.

Evidence on the impact of money injections on output and inflation is sparser. For the Japanese episode, Kimura  et al (2003) found the effect to be small but highly uncertain. It is difficult to know how important quantitative easing was in the case of Japan without knowing how much worse the recession would have been without it.

The impact on yields was short-lived as we have seen them rising again. Moreover, yield moement depends on a list of other factors and it will be difficult to pinpoint the fall on QE alone.

A good quick read.

Literature Survey on Financial Stress, Recessions and How Finance affects Real Economy

June 29, 2009

IMF in its June 09 research bulletin has brief literature survey on all these 3 issues.

 Selim Elekdag reviews financial stressThe financial turmoil that started in the summer of 2007 mutated into a full-blown global crisis. The world economy has experienced a major downturn associated with one of the most severe episodes of financial stress witnessed in decades. While an episode of financial stress encompasses turbulent periods—such as the recent crisis—it also includes related events that only result in asset price corrections, which on occasion may be linked to banking distress. This article briefly surveys recent IMF research related to financial stress across both advanced and emerging economies.


Hui Tong reviews financial market linkages with real economyThe 2007–08 financial crisis began with problems in the subprime mortgage market in the United States but quickly turned into a global financial crisis. The crisis resulted in a wide range of adverse effects on the real economy, as nonfi nancial firms around the world appeared to spiral downward. A key potential contributor to the plight of the nonfinancial firms was the fi nancial crisis itself in the form of a negative shock to the supply of their external financing needs. This article briefly surveys recent IMF research on the real effects of the crisis.


Finally there is an interview of Marocs Terrones who reviews historical analysis of recessions in a Q&A format.

 Good insights. 

Understanding FDR’s Bank Holiday Move in 1933

June 29, 2009

Franklin D Roosvelt was the US President during Great Depression.  Some econ research praises FDR for his role in Great Depression, the others point to some grave errors in his policies. The first says Obama should be as courageous as FDR and latter suggests Obama to avoid the same mistakes.

Anyways, on 5 March 1933 FDR  proclaimed Bank Holiday. William Silber of NY Fed provides an excellent account of the event in this research note.

After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933.

Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933.

Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15—the first trading day after the Bank Holiday ended.

The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.

Read the whole thing for details. A nice lesson in economic history. It provides you a good snapshot of the policies made at the crisis time.


Though am sure economists would differ whether bank holiday worked or not. There must be a lot of literature on the same. But then that is economics for you and you need to take research findings with a pinch of salt.

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