Monday, April 27, 2020

Monetary policy and the Bank of England’s balance sheet-Gertjan Vlieghe

See especially,  "7. Monetary Financing?"

Monetary policy and the Bank of England’s balance sheet 
Speech given by Gertjan Vlieghe, External Member of the Monetary Policy Committee Bank of England
23 April 2020

1 comment:

Joe said...

Some nuggets
"This willingness by banks to hold even quite large amounts of reserves is crucial. It means that the (old) textbook idea that there is some mechanical link between reserves, broad monetary conditions and inflation is just not right. There is an important asymmetry to the provision of reserves: not providing enough reserves will cause interest rates to rise and will tighten monetary conditions. But providing more reserves beyond a certain point, into the region where they become ample, has only a small downward effect on
interest rates and monetary conditions."

"This asymmetry is not the only reason why there is no stable relationship between reserves, broad monetary conditions and inflation. Even before QE, the textbook-assumed stable relationship did not exist. Reserve demand can move for many reasons unrelated to
economic growth and inflation, such as changes in the structure of central bank money market operations"

"Note that, even though in a strict sense some part of government spending is always financed with central bank money, it is not the same as saying that this part of government borrowing is costless. The government owns the central bank. Consider the difference, financially, between the part of government spending that is financed by gilts held by the private sector, and the part that is financed via the central bank. The part that is financed by gilts held by the private sector has an interest rate cost to the government that is just the interest
rate on the gilts. The part that is financed by the central bank is different: the government pays the gilt interest rate to the central bank, the central bank receives this gilt interest rate, but in turn pays out interest on the reserves that finance the gilt holdings But the central bank is owned by the government. So the net, or consolidated, cost to the government of that part of its financing which is done through the central bank, is the interest rate paid on reserves. That is why many economists characterise QE as akin to a switch from borrowing at long-term rates to borrowing at short-term rates."

But the following seems weird "The higher the
outstanding QE as a share of total government debt, the more the government is exposed to fluctuations in short-term interest rates inthe future." since the government own the central bank and the central bank sets interest rates. Exposed, sure. but it's of no real consequence.
The conclusion is kinda weird and not a convincing discussion of hyperinflation.