Non-traditional

Monetary Policy Tools

Bunyamin & Husen & Orxan
 Definition of Non-traditional
Monetary Policy

Non-traditional monetary policy are tools

employed by a central bank or other
monetary authority that fall out of the scope
of traditional measures.
 Limitations of Traditional
Monetary Policy

The federal funds target rate has been lowered to

essentially zero.

During the crisis, disparities in rates across markets have

indicated that arbitrage was not taking place as usual.
 Non- traditional Policy
types

Quantitative easing
Credit easing
Direct asset stabilization of non-
governmental securities
Negative interest rates
 Quantitative Easing

Central bank purchases government securities or other

securities from the market in order to lower interest
rates and increase the money supply.

Considered when short-term interest rates are at or

approaching zero, and does not involve the printing of
new banknotes.
Understanding Quantitative
Easing

Central banks target the supply of money by buying or

selling government bonds.
This lowers short-term interest rates and
increases the money supply.

Another strategy they can use is to target commercial

bank and private sector assets
 The Drawbacks of
Quantitative Easing

If central banks increase the money supply too quickly, it

can cause inflation.

If money does not end up in the hands of consumers, the

lending to the banks will not impact the money supply, and
therefore will be ineffective at stimulating the economy.

Another potentially negative consequence is that

quantitative easing generally causes a depreciation in the
value of the home country's currency.
 Negative Interest Rate
Policy

It is an unconventional monetary policy tool whereby

nominal target interest rates are set with a negative
value, below the theoretical lower bound of zero
percent.
 Negative Interest Rate
During deflationary periods, people and businesses save
money instead of spending and investing. The result is a
collapse in aggregate demand.

A loose or expansionary monetary policy is usually employed

to deal with such economic stagnation.

Instead of receiving money on deposits, depositors must pay

regularly to keep their money with the bank.
 Examples of NIRP
The Swiss government ran a de facto negative interest rate
regime in the early 1970s to counter its currency appreciation
due to investors fleeing inflation in other parts of the world.

In 2009 and 2010 Sweden and in 2012 Denmark used negative

interest rates to stem hot money flows into their economies.

In 2014 the European Central Bank (ECB) instituted a negative

interest rate that only applied to bank deposits intended to
prevent the Eurozone from falling into a deflationary spiral.
 Credit Easing

It is the policy tools used by central banks to make credit

more readily available in the event of a financial crisis, such
as the one experienced in 2007-2008.

FED Chairman Ben Bernanke broadly divided the tools used

into three categories:

Lending to financial institutions

Providing liquidity to key credit markets
Purchasing longer-term securities
 Credit easing vs
Quantitative easing

Unlike Quantitative easing, Credit easing entails an

expansion and focus on the asset side of the Federal
Reserve's balance sheet.

Quantitative easing focused on the liability side of the

FEDs balance sheet.
Thank you for attention