UNCONVENTIONAL MONETARY POLICIES—RECENT
EXPERIENCE AND PROSPECTS—BACKGROUND PAPER*
April 18, 2013

Approved By

Jan Brockmeijer (MCM)
and Tamim Bayoumi (SPR)

Under the guidance of Karl Habermeier, prepared bya team led by Tommaso Mancini-Griffoli, andcomprising Jiaqian Chen, Simon Gray, Tomas
Mondino, Tahsin Saadi Sedik, Hideyuki Tanimoto,
Nico Valckx (MCM), Andrea Pescatori (RES), Silvia
Sgherri (SPR), in collaboration with Bernardin
Akitoby, Takuji Komatsuzaki, and Ariel Binder (FAD).

CONTENTS
Glossary ____________________________________________________________________________________ 3
A. Effectiveness and Channels of Bond Purchase Programs _______________________________ 4
B. Macroeconomic Effects of Bond Purchase Programs _________________________________ 10
C. Spillover Effects on Asset Prices of Unconventional Monetary Policy Announcements 14
D. Inflation and Debt Reduction in Advanced Economies _______________________________ 17
E. Risks of Exit from Bond Purchase Programs ___________________________________________ 19
FIGURES
1. Possible Central Bank Losses in Different Scenarios ___________________________________ 22
2. Asset Price Reactions to Bond Purchase Announcements—Gauging Transmission
Channels ____________________________________________________________________________ 28
3. Surprises Relative to Bond Purchase Program Announcements _______________________ 29
4. Correlation Coefficients, One-Year Ahead Futures on Libor Regressed on Risk Neutral30
5. Announcement Surprise and Effects on 10-Year Government Bond Yields ___________ 31
6. Instability of Coefficients ______________________________________________________________ 32
7. United States Responses to 25 bps Spread Shock ____________________________________ 33
8. United Kingdom Responses to 25 bps Shock Spread _________________________________ 34
9. United States Responses to 25 bps ST Shock _________________________________________ 35
10. United Kingdom. Response to 25 bps ST Shock _____________________________________ 36
11. United States Responses to 25 bps Shock ___________________________________________ 37
12. United Kingdom Responses to 25 bps TP Shock _____________________________________ 38
13. Foreign Bond Yields Responses ______________________________________________________ 43
14. Foreign Equity Prices Response ______________________________________________________ 44
15. Relevant Cross Foreign Exchange Rates Response ___________________________________ 45
16. Foreign Money Market Rates Responses ____________________________________________ 46*Prepared by the Staff of the International Monetary Fund. Does not necessarily reflect the views of the IMF
Executive Board.

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

TABLES
1. Regression Results ______________________________________________________________________ 6
2. Identification Restrictions _____________________________________________________________ 11
3. Identification Restrictions _____________________________________________________________ 13
4. Currency in Circulation, Bank Reserves Balances and Securities Portfolios ____________ 20
5. Central Bank Balance Sheet Size ______________________________________________________ 20
6. Two-Day Change in 10-Year Bond Rates ______________________________________________ 39
7. Two-Day Change in the Rate of Return of the Stock Market __________________________ 40
8. Two-Day Change in the Rate of Return of Cross Bilateral Foreign Exchange __________ 41
9. Two-Day Change in Money Market Rates _____________________________________________ 42
APPENDICES
I. Supplementary Figures and Tables to Section A _______________________________________ 28
II. Supplementary Figures and Tables to Section B ______________________________________ 32
III. Supplementary Figures and Tables to Section C ______________________________________ 39

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Glossary
AE
APP
BOE
BOJ
CME
ECB
EME
ETF
FAD
Fed
GFSR
LSAP
LTROs
MBS
MCM
NPV
OIS
OMO
OMT
QEP
QQME
REIT
RES
SPR
UMP
WEO
ZLB

Advanced Economy
Asset Purchase Program
Bank of England
Bank of Japan
Comprehensive Monetary Easing
European Central Bank
Emerging Market Economy
Exchange-Traded Funds
Financial Affairs Department
U.S. Federal Reserve
Global Financial Stability Report
Large Scale Asset PurchaseLong Term Refinancing Operations
Mortgage-Backed Securities
Monetary and Capital Markets Department
Net Present Value
Overnight Index Swap
Open Market Operations
Outright Monetary Transactions
Quantitative Easing Policy
Quantitative and Qualitative Monetary Easing
Real Estate Investment Trusts
Research Department
Strategy, Policy, and Review Department
Unconventional Monetary Policies
World Economic Outlook
Zero Lower Bound

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1.
This paper provides background information to the main Board paper, “The Role andLimits of Unconventional Monetary Policy.” This paper is divided in five distinct sections, eachfocused on a different topic covered in the main paper, though most relate to bond purchaseprograms. As a result, this paper centers on the experience of the United States Federal Reserve(Fed), the Bank of England (BOE) and the Bank of Japan (BOJ), mostly leaving the European Central
Bank (ECB) aside given its focus on restoring the functioning of financial markets andintermediation. Section A explores whether bond purchase programs were effective at decreasing
bond yields and, if so, through which channels. Section B goes one step further in evaluating
whether bond purchase programs had—or can be expected to have—significant effects on real
growth and inflation. Section C studies the spillover effects of bond purchases on both advanced
and emerging market economies, using very similar methods as introduced in the first section.
Section D breaks from the immediate focus on bond purchases to discuss how inflation might
decrease the debt burden in advanced economies, in light of possible pressures that could fall (or beperceived to fall) on central banks. Finally, Section E discusses the possible risks of exiting given thevery large central bank balance sheets.

A. Effectiveness and Channels of Bond Purchase Programs1
This section evaluates the effectiveness of bond purchases and the transmission channels
through which they operate. Evidence suggests that bond purchases significantly
decreased long-term bond yields. These effects, it seems, were most often transmitted
through the signaling channel, though the duration and scarcity channels also played an
important role. Evidence of diminishing returns is less clear cut.
2.
The effectiveness of asset purchases is measured using event studies that control forsurprises.2 Doing so goes beyond simply measuring the change in asset prices on days ofannouncement. The focus shifts to the effectiveness of asset purchases: the bang (change in yield)
for the buck (surprise). In addition, controlling for surprises allows for a more precise estimate ofpolicy effectiveness. For instance, an increase in bond yields following an announcement is notnecessarily a sign of policy failure.3 On the contrary, it may be entirely consistent with effective
policy to the extent that the announcement disappoints markets relative to more dovish
expectations.
3.
The one-year-ahead futures contract on the three-month Libor is used to measure thesurprise component of announcements. This is in the spirit of Bernanke and Kuttner (2003) which
laid the foundations for event studies in the analysis of monetary policy shocks. Yet, this paper
1

Prepared by Tomas Mondino, in collaboration with Jiaqian Chen and Hideyuki Tanimoto (MCM).

2Krishnamurthy and Vissing-Jorgensen (2011) note that for the objective of analyzing transmission channels,
omitting market-moving events increases noise in the sample, but does not lead to any biases. However, for theobjective of estimating the overall effect of LSAPs, it could lead to an upward or downward bias depending on themarket reaction on these omitted events.

3

Refer to Table 1 in the main paper’s appendix for a list of announcements and related programs (including dates,
sizes and acronyms).

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measures surprises by daily changes on the one-year ahead futures on Libor, instead of the current(next expiring) futures contract for three reasons. First, variance in one-year ahead futures remains
relatively stable from the pre- to the post-crisis period, despite the zero lower bound (ZLB). Instead,the variance of the current futures drops dramatically at the ZLB, especially after the introduction of
forward guidance, thereby complicating empirical analysis.4 Second, Gurkaynak et al (2005) note thatthe one-year ahead futures contract accounts for both target and path surprises (respectively
changes in the timing of rate hikes versus changes in the expected path of future monetary policy).
The current futures is instead more closely correlated with the target factor. Yet, both factors areimportant to capture effects of monetary policy. Third, futures on Libor have good forecasting
power.5
4.
Evidence suggests that bond purchases have been effective at decreasing bond yields.
Table 1 displays coefficient estimates for regressions of various asset prices on the surprise factor.
Regressions are estimated only over a sample of event days, thus there is no need to control forother factors affecting asset prices. As discussed in the main paper and drawing on the literature,
the assumption is that policy announcements dominate any other impulse to asset prices on eventdays. The sample consists of all official and scheduled central bank announcement days. It is
divided into two periods: pre-crisis (2000 to July 2007) and post-crisis (date of first bond purchaseannouncement, to January 2013). Results are robust to extending the pre-crisis period to thebeginning of the first bond purchase program. For the United States (U.S.) and United Kingdom(U.K.), the pre-crisis period corresponds to a period of conventional monetary policy, in which thepolicy instrument was the short-term interest rate. For Japan, the pre-crisis period corresponds
instead to the first period of unconventional easing—the Quantitative Easing Policy (QEP)—
consisting of government bond purchases to satisfy a target for current account balances at the
Bank of Japan (BOJ). To match the duration of the QEP program, the pre-crisis period in Japan isthus amended to go from 2001 to 2006. The surprise factor is used in both pre and post-crisis
periods as a measure of the monetary policy surprise. Finally, the full-sample regression with a UMP
dummy allows for a statistical comparison between the two periods.6

4

Swanson and Williams (2012) note that one-year-ahead eurodollar futures’ sensititvity to macroeconomic news remainednear normal levels until late 2011, around the time of the announcement to keep rates near zero until “mid–2013.”
5

Gurkaynak et al (2007) compare forecasting performance of eurodollar futures with other market-based measures of policy
expectations. They find that eurodollar futures perform as well as or better than any other measure at horizons of six
months or more.

6

The following regression was estimated over both the pre-crisis and post-crisis samples: ∆y_t = a + b S_t + e_t withy being an asset price and S_t the surprise measured with the change in the one-year ahead futures on 3 month
Libor; statistical difference between pre-crisis and post-crisis coefficients is determined with an F-test.

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Table 1. Event Study Regression Results
Response to a Monetary Policy Easing (one basis point decrease in one-year-ahead futures on threemonth Libor)Country:

U.S.

Period:

U.K.

Japan

Pre

Post

Pre

Post

Pre

Post

Gov Bond Yield 2yr-0.70***-0.53***-0.75***-0.63***-0.46***-0.25***Gov Bond Yield 10yr

-0.52***-1.14***-0.49***-0.70***-1.36***-0.82***MBS Yield 15yr

-0.72***-0.88***

Agency Yield 10 yr-0.47***-1.52***BBB-AAA Corp Spread-0.03

0.25***

0.04

1.52***-0.08

Breakeven Inflation 5yr-0.09*

0.05-0.20***-0.18**

Stock Returns

0.01

0.02

-0.05***

-0.05

-0.05

-0.34

NEER

0.00

-0.01*

0.00

-0.02

-0.31

0.08

VIX

-0.13*

0.00

0.11

0.24

-0.19

2.02

FX Risk Reversals 1/-0.01-0.05***-0.05**-0.07*

-0.01

-0.23

Fixed Income

Inflation and output
0.08

Tail Risk

Sources: Bloomberg, Datastream and IMF Staff estimates.
Note: One-day changes in asset prices in response to a monetary policy easing (negative surprise). ***, **, and * mean significantly
different than zero at the 1 percent, 5 percent, and 10 percent level, respectively. Bold fonts indicate coefficients in the post-crisis
period that are statistically different from those in the pre-crisis period. The pre-crisis period runs from January 3, 2000 to
July 8, 2007 for the U.S. and U.K. and from 2001 to 2006 for Japan. The post-crisis period starts on the first announcement of bondpurchases and runs to January 2013. The April 2013 QQME announcement was not included for Japan since a meaningfulmeasure of surprise could not be extracted from the near-zero one year ahead futures on Libor. The sample consists ofevent days listed in Table 6 in the Main Paper and all official central bank announcement days in the period.
1/ “FX Risk Reversal” is the first principle component of FX risk reversals for the bilateral exchange rates of the country studied in
the regression relative to foreign countries (the currencies are USD, GBP, EUR, and JPY). A 2-day window was used for the Risk
Reversals to account for non-overlapping trading hours between countries, at the time of announcement. Option risk reversals arederived from highly liquid option contracts, and are available on a high frequency. Risk reversals are a measure of the skewness ofthe distribution of expectations of future spot rates. A distribution skewed towards a depreciation of the domestic currency
suggests macro tail risks to the domestic economy (fat left-hand tails). The same measure of macro tail risk is used in Chapter 1 of
the October 2012 GFSR.

5.
Key results are as follows:
Government yields: bond purchases, on average, decreased government bond yields. The
effects appear similar in magnitude (for comparable surprises) to conventional rate cuts precrisis. In the U.S., the effect is even statistically larger in the post-crisis than in the pre-crisis
period.

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Inflation and output: Effects on equity prices, five-year ahead breakeven inflation rates—ameasure of inflation expectations stemming from relatively liquid markets, and nominal
exchange rates are mostly insignificant. However, equities and expected inflation rates tend toincrease significantly both pre- and post-crisis when the target factor (current futures) is used asa regressor. This result is consistent with Gurkaynak, et al (2005). A possible explanation is thatchanges to the path factor (one-year ahead futures—this paper’s measure of surprise) also offer
information on the state of the economy, perhaps confirming the market’s negative outlook. The
same explanation may hold for the apparent increase in corporate bond risk premia comingfrom bond purchase programs in the U.S.7 The lack of strong results on equity prices, though,generally supports the main paper’s findings that effects on output from asset purchases are notclear-cut.

Tail Risk: While the effects on mean expectations of growth are unclear, asset purchases seemto have decreased tail risks of a severe economic crisis as shown by the effect on FX risk
reversals for the U.S. and U.K. This is consistent with Chapter 3 of the April GFSR which finds that
unconventional policies appear to have lessened banking sector vulnerabilities and contributed
to financial stability, at least in the short-term. Monthly inflation surveys by Consensus Forecasts,
corroborate these findings, suggesting that the left-skewness (risk of deflation) of the
distribution of individual inflation forecasts decreased after each announcement of bondpurchases.8 In Japan, though, bond purchases do not seem to have affected tail risks, neither inthe QEP program or the current program of Comprehensive Monetary Easing (CME). This isconsistent with Japan not having faced the same prospects of economic and financial meltdown
as in the U.S. and U.K. in 2008–09.

6.
The transmission channels of bond purchases can be empirically disentangled using
two broad approaches. The first is model-based and the second model-free. The first approachrelies on decomposing the yield curve for bonds, using any one of the available dynamic term
structure models. These models extract risk-neutral expectations of future short-term rates on the
one hand, and term premia or the compensation for bearing risk (mostly interest rate risk), on theother hand. The two approximately sum to the observed bond yields. Changes in expected future
short rates on days of announcements are associated with the signaling channel, whereas changes
in term premia are associated with the duration and scarcity channels (the portfolio rebalancing
channel more generally). See Bauer and Rudebusch (2012), Bauer and Neely (2012), and Christensen
and Rudebusch (2012) which develop and apply this model-based approach to recent bondpurchase programs mostly in the U.S. and U.K.
7.
The model-free approach, followed in the literature and in this paper, instead relies on
testable hypotheses to identify separate channels. Theory suggests that each channel will have a
7

Krishnamurthy and Vissing-Jorgensen (2011) finds the same result which it attributes to flight to safety.

8

Because these forecasts are monthly, they cannot be used in event studies. Yet, results are offered as generally
supportive evidence. For other estimates of the impact on tail risks following a similar methodology, see Hattori andothers (2013).

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different effect on different asset prices.9 Thus, a careful study of asset price reactions provides arough picture of the channels relevant to each bond purchases program. The testable hypotheses
are the following:

Signaling channel: Although this channel affects all assets and maturities, Krishnamurthy andVissing-Jorgensen (2010) note that signaling should have a larger impact on medium-term
maturities relative to long-term maturities since a central bank cannot commit to a policy stance
too far into the future. Following the announcement of bond purchase, the signaling channelsuggests that yields on five-year bonds should decrease as much as, or more than, yields on
10-year bonds.



Duration channel: This channel affects bonds of all maturities, as it decreases the price of risk.
Yet, effects should be greater on longer maturities (which are more exposed to interest rate risk).
Therefore, 10-year yields should react more than five-year yields (the opposite of the signaling
channel), and in turn five-year yields should react more than two-year yields.



Scarcity channel: Only the interest rate of the purchased assets should react, according to thischannel. Thus, if 10-year bonds are purchased, 10-year yields should react more than any otheryield. In addition, yields on a 10-year bond should decrease more than on a 10-year overnightindexed swap (OIS) contract, which is less liquid and not accepted as collateral for repo
operations with the central bank (less has lower “use value” or a higher “preference premium”
than 10-year government bonds in the “preferred habitat” models in support of the scarcity
channel—see the main Board paper for references).

8.
It remains to be said that channels are not mutually exclusive of one another. For
instance, while 10-year mortgage-backed securities (MBS) rates might react most to purchases of
10-year MBS (emphasizing scarcity effects), five-year bonds might also react and indeed decrease by
more than 10-year bonds (in accordance with some signaling effects).
9.
Evidence mostly points to the signaling channel, though the scarcity and duration
channels occasionally played important roles.10 Staff estimates of changes in yields of key bonds
are displayed in Figure 2 in Appendix I. Changes in bond yields for each announcement day arestandardized by the announcement’s surprise (∆y_t/∆S_t; where y_t is yields and S_t the surprisemeasured, namely one-year ahead futures on Libor), then added across the various announcements
made in relation to a bond purchase program (surprises relative to each bond purchase program areillustrated in Figure 3. In the U.S. and Japan the signaling channel is prevalent in all programs except
in Maturity Extension Program (MEP, commonly referred to as “Operation Twist”).11 This is evident in

9For more on the transmission channels, see “A Conceptual Framework” section of the main paper.

10

Other papers that emphasize the role of the signaling channel are Krishnamurthy and Vissing-Jorgensen (2011),
and Bauer and Rudebusch (2011).

11

The QQME announcement was not included in this particular analysis, as a meaningful measure of policy surprise
could not be extracted from the near-zero futures on Libor.

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the larger (or equal) changes in five-year bond yields relative to 10-year yields. Operation Twist in
the U.S. and the second wave of the Asset Purchase Program (APP2) in the U.K. worked through theduration channel. In these cases longer-term maturities were affected the most. This is as expected
for Operation Twist which involved a large swap of long for short-term bonds in the hands ofmarket participants (removal of duration risk from investors’ portfolios). The scarcity effect isrejected in both cases since the 10-year OIS and 10-year government yield decreased by the sameamount. Yet, scarcity does appear in the first wave of the Fed’s Large Scale Asset Purchase program(LSAP1A) and LSAP3 and in APP1 in the U.K. In these cases, the purchased assets—marked by anasterisk in the figure—decreased substantially more than other assets. In the U.S., these programs
involved large scale purchases of MBS and Agency bonds, for which the market may indeed havebeen segmented. Results for the U.K. (both APP1 and APP2) generally point to greater market
segmentation than in the U.S., as also suggested in Bauer and Neely (2012). Implications for thedesign of policy from the channels of transmission found to be most active are discussed in themain paper.
10.
Relative to pre-crisis rate cuts, bond purchases extended the signaling channel, butalso gave much greater prominence to the portfolio rebalancing channel. The relative
importance of the signaling versus the portfolio rebalancing channels (duration and scarcity
together) can be gauged using the Kim and Wright (2005) decomposition of the U.S. government
bond yield curve.12 Figure 4 in Appendix I shows the size of coefficients of a regression of monetary
policy surprises (always measured by one-year ahead futures) on the two components of bondyields (expected future short rates versus term premia) at various maturities. Results suggest that:

Prior to the crisis, the main channel of transmission was the signaling channel (predominance ofthe expectations of future short yields component—ST in the figure, even despite the method’s
tendency to under-estimate this component). This is as expected in well-functioning markets,
and with a well understood central bank reaction function.



Post-crisis, the portfolio rebalancing channels significantly grew in importance over all maturities
relative to pre-crisis levels (judging by the higher coefficient on the term premium component).



In addition, post-crisis, the signaling channel was considerably extended in time, having
increasing marginal effects up to seven years ahead.

11.
While not conclusive, evidence points towards some degree of diminishing returns tobond purchase programs. Figure 5 in Appendix I shows that bond purchase announcements had
similar effects on long-term yields through time, when normalizing the effect by the surprise factor.
In other words, the “bang for the buck” of announcements seems to have remained relatively
12

As Bauer and Rudebusch (2012) and others point out, the Kim and Wright decomposition gives a predominant
weight to term premia relative to expectations of future short-term yields. This is because of a high auto-regressive
parameter on the equation of motion of the risk-free rate. While the decomposition may thus have limitations todetermine the relative importance of the signaling versus portfolio rebalancing channels at any given time, it cannonetheless be used to illustrate the evolution of the relative importance of these channels over time. In addition, theKim and Wright (2005) decomposition is readily available on the Fed’s website.

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constant. In addition, in the U.S. where sufficient data is available, the role played by the signaling
versus the portfolio rebalancing channel seems to have been relatively constant over time. Yet, thesurprise of subsequent announcements decreased notably over time. One interpretation is thatsurprises are greater when times are most uncertain (Section C emphasizes this point). Anotherinterpretation is that most of the effects of bond purchases were felt early on, already in anticipationof later programs. Thus, scope for further easing through additional announcements relative toexisting programs may be limited. Announcements of significantly different programs (in size andscope), or made in the context of worsening economic conditions, could instead have greater
effects. These issues are discussed in the main paper.

B. Macroeconomic Effects of Bond Purchase Programs13
This section has two goals. The first is to quantify the macroeconomic impact of bondpurchases on output growth and inflation using U.S. and U.K. data. Consistent with theliterature, a reduction in the yield spread (long minus short-term rates) seems to increase
GDP growth and inflation, though temporarily. However, these results—and those in theliterature—should be interpreted with caution given the instability of coefficients. The
second goal is to analyze the relative effects of the signaling versus portfolio rebalancing
channels on growth and inflation. The analysis requires a new identification strategy
applied to a structural VAR. Results suggest that lowering long-term rates through thesignaling channel are much more effective at increasing growth and inflation than doing
so through the portfolio rebalancing channels.

Macroeconomic effects of bond purchases on GDP growth and inflation
12.
The same caveats as underlined in the main paper continue to apply. The effect of bondpurchases on the macro-economy is gauged through the impact of lower long-term yields on GDP
growth and inflation.14 Yet, the relationship between these variables is subject to long and variable
lags. Especially with the crisis, historical relationships are unlikely to hold. The credit channel, inparticular, is likely to have been perturbed as banks faced pressures to deleverage. Finally, resultscannot be easily generalized, as they focus on just the U.S. and U.K.
13.
The analysis begins with a VAR model including four variables. The model issummarized below:1

wheredenotes inflation, the annualized GDP growth rate,
the short-term interest rate
the term spread (difference between 10-year government bond(three-month treasury yield),
and three-month treasury yields). Consistent with the literature, the lag length is set to two.

13

Prepared by Jiaqian Chen and Tahsin Saadi Sedik (MCM), in collaboration with Andrea Pescatore (RES).

14

Asset purchases affect the macro-economy through many different channels. However, in this section we focus only on
the interest rate channel.

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14.
In this model, four structural shocks are identified: a supply shock, a demand shock, amonetary policy shock, and a shock to the term spread. This last shock is the shock of interest, as it
represents the effects of bond purchase programs (that indeed were designed and found to flatten
the yield curve).
15.
These shocks are identified using a set of sign and exclusion restrictions. These follow
Benati (2008), Benati and Goodhart (2010), Baumeister and Benati (2010), and Kapetanios and others(2012). The restrictions are presented in the table below:
Table 2. Identification Restrictions

Shock/Variables

π

y

SR

SP

Supply+-?

?

Demand+++?

Monetary policy (SR)

-

-

+

-

Spread (SP)

-

-

0

+

Source: IMF staff estimates.

16.
The restrictions are justified as follows. A positive monetary policy shock, which increases
the short-term rate, will lead to a compression in the yield spread, lower GDP growth, and lower
inflation. A positive demand shock will lead to higher inflation, output and short-term interest rates,
while a negative supply shock will lead to higher inflation, but lower output growth. On the other
hand, a positive shock to the spread will lower inflation and output growth. However the spreadshock is assumed to have zero contemporaneous impact on the short-term interest rate. This is key
to identify a “pure” spread shock, namely a flattening of the yield curve without a cut in short-term
rates, as at the ZLB and as discussed in Baumeister and Benati (2010).
17.
The benchmark model is estimated using quarterly data. These run between 2001Q4 and2012Q2 for the U.S. and 2001Q1 and 2012Q2 for U.K.15 However, to investigate the instability of therelationship between term spreads and macroeconomic variables, the model is also estimated using
a rolling sample with a fixed window. For each sample, a full set of impulse responses is computed.
Since in the current environment the policy rate is expected to remain unchanged for an extended
period of time, the short-term rate is restricted to move within a +/- 5bp band for four quarters
after the initial shock.

15

The benchmark sample is dictated by the availability of OIS data used as an instrument for ST, which start in
2001Q4 for U.S. and 2001Q1 for U.K.

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18.

Key results are as follows:

The relationship between the term spread and both growth and inflation varies over time. Thisinstability is illustrated in Figure 6 in Appendix II. Interestingly, the instability does not seem tomaterialize with the crisis, but existed already before. This was a recognized, though possibly
under-appreciated, feature of the yield curve literature, as pointed out in Wheelock andWohar (2009). The instability of coefficients could explain in part the relatively large range ofresults found in the literature, pointed out in the main paper.

Results are broadly consistent with those in the literature. A reduction of the term spreadincreases GDP growth and inflation. While effects appear substantial, they also seem short lived,
disappearing after a few quarters. These results are consistent with those found in Peseran andSmith (2012) and Kapetanios and others (2012).16 On the whole, though, effects are more
persistent for inflation than for GDP growth. Detailed results in the form of impulse response
functions are presented in Appendix II in Figures 7 and 8.

Macroeconomic effects of bond purchases, which channel is strongest?
19.
Does the impact on the real economy differ if bond purchases decrease long rates
through the signaling or portfolio rebalancing channels? The question arises prominently in thecurrent debate on the effects of bond purchase programs.17 Some theory, only just burgeoning,
does suggest that the signaling channel should be effective. This is because shocks to expected
future short rates can be expected to be more permanent than shocks to term premia, and because
lowering term premia beyond a certain point may induce firms to optimize the maturity structure of
their liabilities, without necessarily engaging in productive investments. More details are given in themain paper.
20.
To answer the question, the analysis attempts to estimate the effects of a shock to
expected future short rates versus term premia. As discussed earlier, a shock to the risk neutral
expectations of future short rates (ST) is associated with the signaling channel. Instead, a shock toterm premia (TP) is symptomatic of the portfolio rebalancing channels (either duration or scarcity).
Values for ST and TP are drawn from dynamic term structure models. The following analysis rests on
the decompositions of Kim and Wright (2005) for the U.S. and Guiaraes (2012) for the U.K.
21.
A natural starting point is to replace the term spread (SP) in equation (1) with the twocomponents of long-bond yields (ST and TP). Short term interest rates, instead, are left in theequation to control for the current level of the policy rate. Doing so allows changes in ST to moreclearly capture changes in signaling, over and above changes in short rates. However, ST and TP
16

Peseran and Smith (2012) explicitly discuss the short-lived effect of QE on growth and inflation. While Kapetaniosand others (2012) do not emphasize this aspect of their results, the time profiles of the effects of the QE provided
show similar results, namely the effects of QE are rather short-lived (Chart 2 of their paper, page 35).

17

See Stein (2012a and 2012b)

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shocks cannot be identified in the resulting equation, since both affect inflation, output and shortterm rates in the same manner.
22.
A novel method is introduced to overcome this identification hurdle. The method
introduces an instrument for ST: the OIS rate with a one-year maturity. The OIS rate is a valid
instrument for ST because (i) it is highly correlated with ST since it too captures expectations of
future short rates (the relevance condition); (ii) yet it is not correlated with TP, since it is of shortmaturity and thus contains little term premium (the validity condition; Woodford (2012) also points
this out, for different purposes, though). On this basis, ST is first regressed on the OIS rate and aconstant, and predicted values, ST—now exogenous to TP—are used in the VAR. The exercise isthen to compare the effects of shocks to TP and ST.
23.
In particular, the identification strategy is the following. The
shock is identified byassuming that a positive shock decreases output and inflation, however has no initial impact on the
short-term rate, which is thought to remain at the ZLB. The TP shock is instead identified as having
no contemporaneous impact on , following the instrumental variable logic above. The
identification strategy is unchanged for supply, demand and short-term interest rate shocks.
24.
Results suggest that a shock to expected future short rates has approximately a twotimes larger impact on GDP and inflation than a shock to the term premium. Results, in theform of impulse response functions, are presented in Appendix II (Figures 9 to 12). Otherwise, results
are consistent with former findings: effects of lower long rates on inflation and GDP growth aresubstantial, but short-lived, though are more persistent for inflation than for GDP growth.
Table 3. Identification Restrictions

Shock/ Variables

π

y

SR

ST

TP

supply

+

-

?

?

?

demand

+

+

+

+

?

SR

-

-

+

+

?

ST

-

-

0

+

?

TP

-

-

0

0

+

Source: IMF staff estimates.

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C. Spillover Effects on Asset Prices of Unconventional Monetary Policy
Announcements18
Empirical evidence shows that early announcements of asset purchases in advanced
economies buoyed asset prices globally—as they decreased the tail risk of a severerecession—but their effects diminished once markets normalized. This section is technicalin nature and focuses exclusively on the immediate impact of UMP announcements on
asset prices in emerging economies. The main paper instead also explores the longerterm patterns in capital flows, and policy implications for both emerging and advanced
economies.
25.
The focus of this study is on the impact on foreign asset prices of conventional andunconventional monetary policies in advanced economies.19 Financial market spillovers fromunconventional monetary policy are gauged using event studies. The impact of unconventionalmonetary policies is estimated on two-day returns over a 10-year period from January 1, 2003 to
December 31, 2012. The study focuses on four asset markets (money, bond, equity, and foreignexchange market) in a wide range of countries—23 advanced economies (AEs), 11 emerging
markets economies (EMEs).20 Effects on asset prices are gauged following surprise policy moves,where the surprise is measured as earlier using one-year-ahead futures on Libor.21 The pre-crisis andnon-UMP post-crisis announcements provide context against which to examine how far responses
to unconventional monetary policies were dissimilar to those of conventional cut rates during preand post-crisis periods, respectively.
26.
The analysis is adapted to control for “typical” international and domestic financial
linkages. High correlations in asset prices both across and within countries imply complex dynamics,
even at daily frequencies. The direct impact of a monetary surprise on an asset price in a foreigncountry is often magnified by indirect spillovers via third countries, as well as the response of otherdomestic assets, for instance the money market. Analogously, the direct effect of early U.S. bondpurchase announcements on bond yields in EMEs appears to have almost doubled by indirect
spillovers through simultaneous asset price movements in other advanced, systemic economies.
18

Prepared by Silvia Sgherri (SPR).

19

The impact of unconventional monetary policies on capital flows—and associated policy challenges in recipient
countries—will be analyzed in a separate paper.

20

The advanced markets included in the analysis are Australia, Austria, Belgium, Canada, Czech Republic, Denmark,Finland, France, adopted Germany, Greece, Ireland, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, the U.K., and the U.S. The emerging markets are Brazil, China, India, Indonesia, Malaysia,
Mexico, Poland, Russia, South Africa, Thailand, and Turkey. In the context of the event study, country-specificestimates have been pooled across selected subgroups of countries having similar characteristics by using
Generalized Least Squares with robust standard errors for panel regressions with cross-sectional dependence. A
two-day window is used to account for differing time zones in the sampled markets—in particular, Asian markets inany given day are closed before the same day session in the U.S. starts.
21

For an illustration of measured surprises from announcements of bond purchase programs, see Figure 3.

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27.
A two-stage approach is used to control for this “typical” behavior. First, thetransmission of shocks between bond yields, equity prices, exchange rates, and money market rates
within and between the four systemic financial markets (Germany, Japan, the U.K., and the U.S.) is
examined in a simultaneous manner. Specifically, a structural VAR is estimated by identifying theshocks through heteroscedasticity. 22 Next, the corresponding underlying shocks are used as inputs
into a similar system for each small open economies of interest, with the goal of uncovering typicalcorrelations among domestic assets. For example, the model for Brazil accounts forcontemporaneous financial markets shocks from the four systemic AEs as well as interactions acrossBrazilian asset prices.
28.
The limitations of the event study approach need to be recognized. Examining knock-on
responses of financial markets to bond purchase announcements helps avoid concerns that
responses are being contaminated by nonpolicy-related news. Also, spillover effects are expected to
rapidly transmit between liquid and highly integrated financial markets through portfolio
rebalancing and expectation channels. However, event studies only reveal the immediate market
reaction to such policies. As views on the impact of unconventional policies evolve over time, theserevisions will not be captured by these event studies. Also, interpreting market responses to UMP isdifficult, as announcements reveal both a policy decision and an assessment of current economic
conditions.
29.
Results based on the above methodology suggest that spillovers from bond purchases
are largest when domestic risks are most acute.23 Early announcements of bonds purchases in the
U.S. led to major global financial market rallies, involving widespread reductions in bond yields andmoney market rates (Figures 13 and 16), rises in equity prices (Figure 14), and appreciation ofcurrencies vis-à-vis the U.S. dollar (Figure 15). Later announcements had either more muted effects
on all foreign assets, or even negative effects on equities and bond yields. A similar basic pattern
emerges following announcements in the U.K. The exchange rate effect, though, is similar to that ofearly U.S. announcements. Analysis shows a general appreciation of emerging-market currencies
against the U.S. dollar and British pound, respectively (Figure 15). Later announcements, however,
have had a more modest impact on exchange rates. In Japan, asset purchase announcements led tofalling foreign equity prices, while triggering broad depreciation of foreign currencies vis-à-vis theJapanese yen, possibly reflecting market repricing of yen-denominated assets as the 2008–09
24
financial crisis mostly affected the rest of the world (on this point, see also Section A).

22

The approach is similar to that taken in Ehrmann, Fratzscher, and Rigobon (2011), although extended and modified
to analyze spillovers between bond, equity, exchange rate, and money markets within and between the four systemic
economies. Greater details of the methodology are provided in Sgherri (2013, forthcoming).

23

Tables 6–9 summarize the sign of the significant impact from a monetary policy surprise from different types ofmonetary policy announcements on asset prices, while Figures 13–16 plot the estimated cumulative effect of thesurprise for each type of announcement and each group of countries.

24

The April 2013 announcement introducing Quantitative and Qualitative Monetary Easing (QQME) in Japan is notincluded in the sample. QQME extends government bond purchases to all maturities with the goal of doubling the
average remaining maturity of outstanding bonds from 3 to 7 years. It also increases planned purchases of private(continued)
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UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

30.
More broadly, results suggest that financial market spillovers of bond purchases varyby market conditions. The spillover effects of early bond purchase programs appear to be thelargest. This could be due to the market stabilizing impact of such programs, not only in domestic
economies, but also globally, given the systemic importance of the economies initiating thepurchases. Spillovers were smaller once markets normalized. However, the lower spillover effects
from later programs may also come from the fact that the announcements associated with these
programs surprised markets less (see Figure 3 in Appendix I for an illustration of surprises acrossprograms).
31.
The Outright Monetary Transactions (OMT) announcement by the European Central
Bank (ECB) further highlights the importance of the market stability signal. The announcement
raised bond yields in the core of the euro area and in much of the rest of the world, but significantly
lowered bond yields in the euro area periphery. This reduction in tail risks in the euro area—aconcern that was weighing heavily on financial markets—led to a generalized rally in global equity
markets.
32.
Pre-crisis easing and post-crisis policy announcements unrelated to unconventional
policies appear to have had similar spillover effects. The sign and size of the bond market
spillovers were generally similar (Table 6). Evidence from other asset markets is, however, far more
mixed (Tables 7–9). Also, in the pre-crisis period, U.S. monetary policy appears to have had larger
and more generalized financial market spillovers than policy surprises in other countries. An
expansionary monetary policy shock in the U.S. tended to boost domestic financial conditions in therest of the world. Bond yields generally fell while equity prices rose together with money market
rates in AEs.
33.
Results are echoed by other studies. These studies mostly find that early bond purchaseannouncements in AEs had the largest spillovers effects. These announcements buoyed asset prices
globally by decreasing the tail risk of a severe recession, but their effects diminished once markets
normalized.25 Studies point to significant spillover effects on bond yields and currency in EMEs, withlarger estimated effects from LSAP1 than from LSAP2.26 Evidence of spillovers from U.S. bondassets, mainly exchange-traded funds (ETFs) and real estate investment trusts (REITs) to stimulate activity. On thewhole, the program’s goal is to add JPY 60 to JPY 70 trillion per year to the monetary base. On the day ofannouncement, global bond yields decreased by an average of 10 bps, foreign equity prices fell around 2 percent,and, most notably, the yen depreciated by around 3 percent.
25

IMF (2012), for instance, suggests that in times of high uncertainty, market volatility and flight to safety effects
interact with—and sometimes even offset—spillovers on bond yields and currencies in EMEs.
26

There is relatively little research on the international spillovers of central bank balance sheet policies, especially the
impact on emerging markets. Exceptions are Chen, Filardo, He and Zhu (2012), Glick and Leduc (2011), Neely (2012),
Bauer and Neely (2012), Fratzscher, Lo Duca, and Straub (2012), Bayoumi and Bui (2011), IMF (2011). To give a senseof the order of magnitude, Neely (2012) finds that US quantitative easing lowered bond rates in the other AEs by 20–
80 basis points and the value of U.S. dollar by 4–11 percentage points. Glick and Leduc (2011) showed that
commodity prices fell on average on days of the Fed LSAP announcement, associated with declines in long-term
interest rates and dollar depreciation.

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purchases in non-U.S. AEs appears rather muted. Shocks to bond and equity markets in the U.K. andeuro area generated mild spillovers to other AEs.27

D. Inflation and Debt Reduction in Advanced Economies28
While higher inflation could help reduce somewhat the public debt-to-GDP ratio in
advanced economies, it could hardly solve the debt problem on its own and would raisesignificant challenges and risks. First of all, it may be difficult to create higher inflation, as
evidenced by Japan’s experience in the last decades. In addition, un-anchoring of inflation
expectations could increase long-term real interest rates, distort resource allocation,
reduce economic growth, and hurt the lower–income households.
34.
Higher inflation could help reduce public debt through three main channels. First,
governments can capture real resources by base money creation (seigniorage). Second, inflation canerode the real value of the debt. The impact of this channel will depend on the maturity structure
and currency denomination of the debt, as well as on the interest rate response to higher inflation,with inflation having the largest impact on long-term, fixed rate, and local-currency-denominateddebt: short-term debt and maturing long-term debt will need to be refinanced at higher interest
rates, floating rate debt will adjust automatically to higher rates, and the local currency value of
foreign-currency-denominated debt will rise due to the currency depreciation that will accompany
higher inflation. Third, inflation can affect the primary balance, including if brackets are not indexed
under a progressive income tax. Akitoby and others (2013) simulate the effect of the first twochannels for G-7 countries.
35.
Given the relatively low levels of base money in most advanced economies,
seigniorage from higher inflation would play only a limited role in bringing down debt ratios.
Simulations suggest that one additional point of inflation would raise seigniorage for the sample byabout 0.12 percent of GDP annually. So, raising inflation from World Economic Outlook (WEO)
baseline projections to 6 percent for five years would generate cumulative seigniorage revenue ofabout 2½ percentage points of GDP. Country-specific estimates vary from less than one percent(Canada) to about 5 percent (Japan).
36.
The debt erosion channel could have a stronger impact. The same increase in inflation,
while assuming a constant debt maturity structure, no impact of inflation on economic growth, anda one-for-one adjustment to inflation of nominal interest rates on newly-issued debt (full Fisher
effect) would reduce the average net debt-to-GDP ratio by less than 10 percentage points by the27

Joyce and others (2011) show that QE announcements in the U.K. depreciated its currency by 4 percent. Eventstudies of large-scale asset purchases by Japan did not find significant impact on exchange rates, although Japan’s
QE in earlier 2000s appears to have a sizable impact on emerging Asian countries.

28

This section is based on Akitoby and others (2013) and the authors’ contributions to the Fiscal Monitor (2013).

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end of the period for most countries (other than Japan and Italy, where the effect would be larger).29
The erosion effect drops rapidly after five years, because an increasingly large share of securities will
have been issued at higher interest rates, including replacing maturing debt that had been issued atlower rates. At this time, debt-to-GDP ratios could start increasing again, underscoring the
temporary nature of the relief provided by inflation. Real interest rates on debt could rise, due to an
inflation risk premium, and growth could be eroded from higher inflation, or uncertainty over
inflation.
37.
While higher inflation could have some effect on debt stocks, it could hardly solve thedebt problem on its own and would raise significant challenges and risks. As a practical matter,it might be difficult to lift inflation to a meaningful level in the current economic environment, as
evidenced by Japan’s experience in the last decades; and, in any case, countries in a monetary union
would not be able to use this tool on their own. More importantly, reliance on inflation to erodedebt could lead to fiscal dominance,30 with inflation rates drifting even higher as confidence in the
future value of money is lost. As a result, inflation expectations could be un-anchored, thus
undermining the credibility of the framework built over the past three decades to control inflation.
Un-anchoring of inflation expectations might also have significant implications for the future
structure of government debt portfolio, making it more crisis prone by raising liquidity, currency,
and interest rate risk.
38.
Un-anchoring of inflation expectations could increase long-term real interest rates,
distort resource allocation, reduce economic growth, and hurt the lower–income households.
This would likely make it difficult for government to finance their budgets and lead to even higher
debt-to-GDP ratios. Introducing some form of financial repression could keep interest rates low, butsuch policies may be difficult to enforce in a complex financial environment and could cause
additional collateral damage to the economy. Altogether, the output costs of restoring inflation tomore moderate levels in the future would be substantial, based on the experience in the advanced
economies in the 1980s (IMF 2012b). And inflation would have a highly regressive impact on
incomes: while higher inflation would be a tax on bondholders, it would also disproportionately
affect lower-income households, which tend to have more limited access to indexed assets.

29

These debt reductions may be overestimated because of the underlying assumption that inflation does not affectoutput growth, debt structure or real interest rates. For instance, if maturity shortens in response to the inflation
shock, the impact of inflation on the reduction would be somewhat smaller.
30

Fiscal dominance can be defined as a situation where monetary policy is driven by the need to ensure fiscal
sustainability when fiscal policy cannot adjust.

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E. Risks of Exit from Bond Purchase Programs31
Central bank balance sheets have grown in size and maturity following recent bondpurchase programs. This section investigates two implications. First, could central banks
generate losses from tightening policy rates? And second, how will the transmission
channel be affected by the excess liquidity?

Risk of central bank losses
39.
As pointed out in the main paper, central banks might endure losses in the case of exit
because of a maturity mismatch on their balance sheets. With large scale bond purchaseprograms, assets have become of increasingly long maturity. Liabilities, on the other hand, haveshifted proportionally from currency to costly reserve balances. Upon exit, returns from assets would
remain unchanged, while interest paid on liabilities would increase with the policy rate. This could
generate negative cash flows, and thus losses, to the central bank. In net present value terms, theselosses are very similar to selling long term assets outright, as the value of bonds reflects
expectations of future interest-rate increases.32 As mentioned in the main paper, though, losses are
relevant mostly to the extent that they could put pressure on central bank independence. Losses per
se should not constrain the effectiveness of monetary policy.
40.
Pre-crisis, the AE central bank balance sheets consisted mostly of currency. There wassubstantial demand for currency and reserve balances (which commercial banks need for
33
transactional reasons) and central banks were reasonably free to choose the counterpart assets.
As currency represented a substantial part of liabilities, central banks mostly generated positive cash
flows: earnings on government bonds and credit to sound banks comfortably covered operationalcosts and any interest paid on non-currency liabilities. As a result, central banks normally remitted
surplus income to the government.
41.
Balance sheet expansion since 2008, particularly in the U.K. and U.S., means that34
reserve balances—on which interest is paid—now dominate liabilities (Tables 1 and 2). For the
moment, the central banks still run a profit, as the return on their asset portfolio—whether bonds, orin the case of the ECB credit to banks—is higher than the reserves remuneration rate (whichcurrently is unusually low).
31

Prepared by Simon Gray and Nico Valckx (MCM).

32

In order to gauge potential fiscal pressures arising from these potential central bank losses (e.g., through lower
remittances), the net present value would need to be converted into flows over the years under consideration. This
pre-supposes some knowledge of the allocation of bond purchases over time and across maturities and requires
accounting for portfolio dynamics (including declining maturities and related changes to model-based bond prices,
bonds’ duration, etc.), which goes beyond the scope of this section.
33
This would not be true for an exchange-rate targeting central bank, which may need to purchase foreign exchange
in pursuit of its policy, generating reserve balances in excess of demand.
34

The balance sheet expansion is a result QE (Japan, U.K., U.S.) and financial stability lending (ECB).

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Table 4. Currency in Circulation, Bank Reserves Balances and Securities Portfolios(As percent of balance sheet)
Currency inCirculation

Reserve Balances

Securities Portfolio

Jan 2007

Jan 2013

Jan 2007

Jan 2013

Jan 2007

Jan 2013

Federal Reserve Bank

90

38

1

54

88

90

ECB

52

31

15

31

0

7

Bank of Japan

68

53

7

28

71

72

Bank of England

48

14

23

67

8

96

1/

Sources: Central bank websites and staff calculations.
1/ SMP portfolio.

Table 5. Central Bank Balance Sheet Size
(As percent of GDP)

Balance Sheet Total

Federal Reserve Bank

Currency inCirculation

Securities Portfolio

Jan 2007
6

Jan 2013
19

Jan 2007
6

Jan 2013
7

Jan 2007
6

Jan 2013
17

14

32

7

10

0

2

22

33

15

18

16

24

6

26

3

4

1

25

ECB
Bank of Japan
Bank of England

Sources: Central bank data and IMF staff calculations.

42.
A sharp increase in short-term rates might inflict losses on the central banks, as
35
payments of interest on liabilities could exceed coupon payments on securities. The Federal
Reserve Bank (FRB) and Bank of England (BOE) are probably most at risk in this respect (although
the BOE has a government indemnity against losses sustained on its QE portfolio). The Bank of

35

The Net Present Value (NPV) of likely future losses could show up as revaluation losses, whether realized if bonds
are sold to drain excess reserves, or unrealized, if the portfolio were marked to market. Not all central banks marktheir portfolios to market—in some cases because historically such portfolios were not intended for sale. But the
cash flow loss will be the same, whether or not the portfolio is marked to market.

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Japan (BOJ) has a shorter maturity profile in its assets, and a lower proportion of bonds in its
balance sheet total, and so faces less interest-rate risk.36
43.
The ECB faces relatively little direct interest rate risk, as the bulk of its loan assets arelinked to its short-term policy rate. However, it may be difficult for the ECB to shrink its balance
sheet, as those commercial banks currently borrowing from the ECB may not easily be able to repay
loans on maturity. The ECB could use other instruments to drain surplus liquidity, but could thenface some loss of net income as the yield on liquidity-draining open market operations (OMOs)
could exceed the rate earned on lending, assuming a positively-sloped yield curve, if draining
37
operations were of a longer maturity. The ECB’s new bond portfolio (SMP purchases) is small
relative to balance sheet size. As a result, the ECB is not considered in the estimation of losses
discussed below.
44.
Central banks’ potential losses from bond holdings can be analyzed under various
38
assumptions about interest rates and future bond purchase strategies. These losses broadly
depend on (i) the size of central banks’ bond holdings and the extent of any additional purchases;(ii) the maturity of bonds purchased; and (iii) the severity of the interest rate scenario. Figure 1 below
indicates that the net present value of losses, as a percent of GDP, could be substantial, even formodest interest rate increases.. Figure 1 also illustrates the yield curves attached to each of three
exit scenarios. The first assumes a small, parallel shift in the yield curve; the second is similar to theyield curve change seen through 1994 (many market participants now refer to this); and the thirdreflects a more extreme inflation shock. No stance is taken relative to when the change may occur,
nor over what period adjustment might take place, though the third scenario is clearly a tail risk. The
second scenario is also very similar to the one used by Carpenter and others (2013), which projects
the Fed’s balance sheet and earnings under various asset purchase scenarios. Their base case arrives

36

In Japan, banknote demand prior to the early 1990s was stable at 6–7 percent of GDP, but rose to around18 percent at present. Three important drivers for this have been: the very low level of deposit interest rates (so theopportunity cost of holding cash is low); some concern about the soundness of banks, following financial turmoil in
1997–98; and the removal of the blanket deposit guarantee in 2002. In a prolonged low interest-rate environment
with concerns about banking sector strength, other countries could see a similar development. Indeed, since 2007
banknotes in circulation, as a percent of GDP, have risen in all of the cases considered here. By contrast, a future“normalization” might see cash demand in Japan drop back to previous levels, in which case the BOJ would lose
substantial seigniorage revenue.

37

Lending rates are linked to the short-term OMO rate, regardless of maturity, at the moment. Draining operations
could be longer maturity—several months or even years—and therefore further out on the yield curve.
Potential losses are projected using a bond price valuation formula ∆P/P = ½ C∆i2 - D∆i. The formula is a secondorder Taylor approximation of the price impact of a change in yields (see Campbell, Lo and MacKinlay 1997) andrelates relative bond price changes (∆P/P) to changes in yields (∆i); C denotes convexity and D modified duration. By
using effective duration and convexity, obtained from a proper valuation model, it is possible to apply the formula toMBSs, whose cash flows also vary with interest rates (Fabozzi 2013). Projections are based on various interest ratescenarios, as well as current and future bond purchase strategies (see notes to Figure [E.1] for details).
38

INTERNATIONAL MONETARY FUND

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UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPERat maximum (unrealized) losses of about 1.6 percent in 2017 (as a percent of 2012 GDP), assuming
asset purchases continue into 2013.39
Figure 1. Possible Central Bank Losses in Different Scenarios
7Interest rate and bond yield scenarios(Percent )
6
5
4
3

-7
Scenario III

Central Bank Losses from QE holdings-8(Percent of GDP)No Expansion B/S
Expansion B/S-6-5

Scenario II-4

Scenario I

-3

2

-2

1

-1

6 Feb 201300
1 3 5 7 10 20 30 1 3 5 7 10 20 30 1 3 5 7 10 20 30
USA

UK

JAP

I

II
Fed

III

I

II
BOE

III

I

II

III

BOJ

Sources: Federal Reserve Bank of New York System of Open Market Accounts; Bank of England; Bank of Japan; J.P. Morgan; U.S.
Treasury; UK Debt Management Office; Japan's Ministry of Finance; and Staff computations
Notes: Central Bank losses from asset purchases are based on bond valuations as of February 6, 2013 using price sensitivity tointerest rate changes, multiplied by the central banks’ balance sheet exposure, and expressed as a percent of 2012 GDP. Pricesensitivity is computed as ½ C∆ i2 - D∆ i, where ∆ i denotes changes in yields, C convexity and D modified duration. Losses follow
three scenarios: I. parallel shift +100 bps in yields, II. +400bps in short-term and up to+225bps in long term yields (Japan +200 and+125bps, respectively) and III. +600bps in short term and up to +375bps in long run yields (Japan +400bps and +167bps). 'No
expansion B/S' assumes a static balance sheet (B/S). The Fed B/S expansion assumes purchases of UST and MBS until end-2013 of$85bn per month. The BOE B/S expansion assumes an addition of £75bn to its Asset Purchase Facility in the long range (+7 years)
segment. The BOJ B/S expansion accounts for the April 4, 2013 announcement of qualitative and quantitative easing of ¥100 trillion
JGB purchases in 2013-14 at a longer maturity (going from slightly below 3 years to about 7 years).

45.
Thus far, credit risk on bond portfolios is contained by the relatively small proportionof non-government securities purchased by these central banks. But the ECB potentially faces
credit risk on its lending to the banking system for financial stability purposes. In a “benign”
scenario, where monetary tightening is a response to higher inflation resulting from economic
growth, non-performing loans should fall and bank balance sheets should improve. But even then,some areas of the eurozone may lag in economic recovery. Banks in such areas could come underfurther pressure in a rising rate environment: weak banks may not be able to pass on to weakcustomers the rising costs of financing their balance sheets.

Transmission of policy
46.
Apart from balance sheet risk, a future tightening of monetary policy is likely to be
bumpy. Central banks will enter a phase of largely uncharted waters as they transition fromoperating policy with excess liquidity, where market rates are guided by the interest paid on excess

39

Other approaches also exist. For instance, McLaren and Smith (2013) arrive at different estimates of losses for the Bank ofEngland as they focus on losses net of capital gains and income from asset holdings.

22

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reserves, to a higher level of policy rates and eventual resumption of OMOs to guide short-term
market rates.


There is reason to expect that, in the presence of substantial excess reserve balances, arbitrage
will be less effective40 in transmitting the policy rate to other market prices, so that market
expectations and the impact on future inflation will be less smooth. This in itself suggests that
central banks will want to drain excess reserves, at the appropriate time, rather than simply
relying on interest on excess reserves. On balance, central banks should be able to move market
rates in the right direction, but setting of policy rates will not be as finely tuned during the exit
as pre-crisis, as the market response will be less predictable initially (possibly for several months
or even years).



A move to a tightening stance—which could be signaled either by starting to run down (or stop
accumulating) securities portfolios or by raising short-term rates—could lead to sharp
movements in the longer-term yield curve as investors try to anticipate the longer-term impactof the policy reversal. A likely consequence would be reduced market liquidity until expectations
41
stabilize. Higher rates might also induce an appreciation of the currency, further complicating
policy and fueling uncertainty over future short rates.

47.
There are ways to reduce the impact of exit on long rates. Clear forward guidance would
help manage expectations of future short rates.42 Also, liquidity draining operations could befocused on short-term instruments, such as three or six month repos, at least early in the tightening
cycle. And when central banks resort to asset sales, these could be pre-announced to dampen
movements in term premia. Finally, in the U.S., the Fed could operate with a wider range ofcounterparties than pre-crisis, so as to help overcome market segmentation. Yet, it may be less clear
how transmission through a larger and more diverse group of counterparties will work. It remainsthat expectations, rather than central bank policy, will continue to drive longer-term yields.

40

When all major market participants are cash rich, they will have little incentive in a low interest rate environment tocompete for funding and, by competing across different markets, to arbitrage out rate variations.

41
As an example, if the U.S. yield curve moves from its current level (three months–10bp; 10-years 2 percent; 30 years
3.2 percent) to a flat 4 percent, bonds in the 10–30 year range could lose 14 to 16 percent of their value.

42

Syed and Yamaoka (2010) underscores the importance of clear communication in the BOJ’s relatively smooth exitfrom very accommodative monetary policies and balance sheet expansion in March 2006. Yet, the BOJ’s balance
sheet at the time consisted mostly of open market operations of one year or less, while many of the assets purchased
where also of very short maturity. The central bank’s balance sheet thus quickly shrank without needing outrightasset sales.

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23

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

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INTERNATIONAL MONETARY FUND

27

INTERNATIONAL MONETARY FUND

Figure 2. Asset Price Reactions to Bond Purchase Announcements—Gauging Transmission Channels

2

2

OIS 10yr

1

MBS
15yr*

OIS 10yr

Gov 10yr

MBS
15yr*

1

Gov 2yr

Gov
10yr*

Gov 2yrGov 5yrGov 5yr

LSAP1 A (US)

Agency10yr-4-1

MBS 15yr

Agency10yr

6

MBS 15yr OIS 10yr

MBS
15yr*

3
0

Gov 2yr

Gov 10yr

Gov 2yrGov 5yrGov 5yr

LSAP1 B (US)LSAP2 (US)LSAP3 (US)Gov 2yrGov 2yr3

AA Corp1

2-5
OIS 10yr

3
2
1
0

Gov 10yr*-102
Gov 10yr*

OIS 10yr

00

OIS 10yr

Agency10yr

Agency10yr*

Agency10yr*

J-REITs*1
Gov 5yr OIS 10yr0

Gov 5yr0

Nikkei*0

BBB Corp-1

Gov 2yrGov 2yrGov 5yr

TWIST (US)

Sources: Bloomberg and IMF staff estimates.

Gov 10yr*

APP (UK)

Gov 10yr*

Gov 5yr

Gov 10yr*
APP (UK)

CME (Japan)

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

28

Appendix I. Supplementary Figures and Tables to Section A

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 3. Surprises Relative to Bond Purchase Program Announcements(Changes in one-year futures on 3m Libor, bps, cumulated over each asset purchase program.)

U.K.

U.S .

JP
10

10

0

0
LSAP1A

LSAP1B

LSAP2

TWIST

LSAP3

APP1

APP2

CME

-10

-10

-20

-20

-30

-30

-40

-40

-50

-50

-60

-60

-70

-70

Sources: Datastream, Bloomberg, and staff calculations.

INTERNATIONAL MONETARY FUND

29

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 4. Correlation Coefficients(One-year ahead Futures on Libor regressed on risk neutral expectations of future short-term rates (ST)and term premia (TP) of government bonds of various horizons)
0.9
0.8
0.7
0.6
st post0.5

tp post0.4

st pre0.3

tp pre

0.2
0.1
0
1

2

3

Source: IMF staff estimates.

30

INTERNATIONAL MONETARY FUND

4

5

6

7

8

9

10

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 5. Announcement Surprise and Effects on 10-Year Government Bond Yields

U.S. 10-yr Gov Bond

U.K. 10-yr Gov Bond
20

Change in
10-yr Gov Bond yield

Change in
10-yr Gov Bond yield

20
0
-20
-40

Last
Early

-60
-40

-20

0

0
-20
-40
-60

20

-40

1-yr ahead Futures0

20

1-yr ahead Futures

Kim-Wright

JP 10-yr Gov Bond

60

4
2

Signaling Share( In percent)

Change in
10-yr Gov Bond yield

-20

0
-2
-4
-6

50
40
30
20
10
0

-8
-10

-5

0

5

1-yr ahead Futures

-40

-20

0

20

1-yr ahead Futures

Sources: Bloomberg, Kim-Wright (2005), IMF staff estimates.

INTERNATIONAL MONETARY FUND

31

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Appendix II. Supplementary Figures and Tables to Section B
Figure 6. Instability of Coefficients
U.K. Instability of Coefficients
1
COEF_GDP_UK

0.5

COEF_INF_UK

0

-0.5

-1

-1.5

-2
2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1

U.S. Instability of Coefficients
0.8
0.6
COEF_GDP_US

0.4

COEF_INF_US

0.2
0
-0.2
-0.4
-0.6
-0.8
-1
2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1

Source: IMF staff estimates.
Note: Each point represents the sum of the first and second lag coefficients of the spread form thereduced form VAR. The coefficients are obtained using a roling sample with a fixed window. For example,
2012Q2 represents the sample 2001Q4-2012Q2 for US and 2000Q4-2012Q1 for UK.

32

INTERNATIONAL MONETARY FUND

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 7. United States Responses to 25 bps Spread Shock
Inflation

GDP

1

3.5
3

0.8

2.5

Median0.6

0.4

75th percentile

2

25th percentile

1.5
1

0.2

0.5
0

0

-0.5
-0.2
1

2

3

4

5

6

7

8

9

10

11

12

-1
1

Short-term Interest Rate

2

3

4

5

6

7

8

9

10

11

12

3

4

5

6

7

8

9

10

11

12

Spread

0.16

0

0.14
-0.05

0.12
0.1

-0.1

0.08
-0.15

0.06
0.04

-0.2

0.02
-0.25

0
-0.02

-0.3

-0.04
-0.06
1

2

3

4

5

6

7

8

9

10

11

12

-0.35
1

2

Source: IMF staff estimates.

INTERNATIONAL MONETARY FUND

33

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 8. United Kingdom Responses to 25 bps Shock Spread
GDP

Inflation
0.3

0.4

0.25

0.3

Median0.2

75th percentile

0.15

25th percentile

0.1

0.2
0.1
0

0.05

-0.1

0

-0.2

-0.05

-0.3

-0.1
-0.15

-0.4
1

2

3

4

5

6

7

8

9

10

11

12

1

3

4

5

6

7

8

9

10

11

12

3

4

5

6

7

8

9

10

11

12

SpreadShort-term Interest Rate
0.08

0.05

0.06

0

0.04

-0.05

0.02

-0.1

0

-0.15

-0.02

-0.2

-0.04

-0.25

-0.06

-0.3
1

2

3

4

5

6

7

8

9

Source: IMF staff estimates.

34

2

INTERNATIONAL MONETARY FUND

10

11

12

1

2

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 9. United States Responses to 25 bps ST Shock
Inflation

GDP

3

6

2.5

5

Median275th percentile

1.5

25th percentile

4
3

1

2

0.5

1

0

0

-0.5

-1

-1

-2
1

2

3

4

5

6

7

8

9

10 11 121

Short-term Interest Rate

2

3

4

5

6

7

8

9

10

11

12

4

5

6

7

8

9

10 11 12

TP

0.6

0.2

0.4

0

0.2

-0.2

0
-0.2

-0.4

-0.4

-0.6

-0.6

-0.8

-0.8

-1

-1
-1.2

-1.2
1

2

3

4

5

6

7

8

9

10 11 12

2

3

4

5

6

7

8

9

10 11 12

1

2

3

ST
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
1

Source: IMF staff estimates.

INTERNATIONAL MONETARY FUND

35

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 10. United Kingdom Responses to 25 bps ST ShockGDP

Inflation
1.4

5

1.2
1

Median4

75th percentile

3

25th percentile

0.8

2

0.6

1

0.4

0

0.2

-1

0

-2
1

2

3

4

5

6

7

8

9

10 11 121

Short-term Interest Rate

3

4

5

6

7

8

9

10

11

12

4

5

6

7

8

9

10 11 12

TP

0.2

0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35
-0.4
-0.45

0
-0.2
-0.4
-0.6
-0.8
-1
-1.2
1

2

3

4

5

6

7

8

9

10 11 12

2

3

4

5

6

7

8

9

10 11 12

ST
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35
-0.4
1

Source: IMF staff estimates.

36

2

INTERNATIONAL MONETARY FUND

1

2

3

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 11. United States Responses to 25 bps Shock
Inflation

GDP

1

1.4
1.2

0.8

Median0.6

75th percentile

0.8

25th percentile

0.6

0.4

1

0.4
0.2

0.2

0
-0.2

0

-0.4

-0.2

-0.6
1

2

3

4

5

6

7

8

9

10 11 12

1

2

3

4

5

6

7

8

9

10 11 12

2

3

4

5

6

7

8

9

10 11 12

ST

Short term interst rate
0.16

0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05
-0.1

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
-0.02
1

2

3

4

5

6

7

8

9

10 11 12

2

3

4

5

6

7

8

9

10 11 12

1

TP
0.05
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
1

Source: IMF staff estimates.

INTERNATIONAL MONETARY FUND

37

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 12. United Kingdom Responses to 25 bps TP ShockGDP

Inflation
1

4
Median0.8

75th percentile

0.6

25th percentile

3
2

0.4

1

0.2

0

0

-1

-0.2

-2
1

2

3

4

5

6

7

8

9

10 11 121

Short-term Interest Rate

3

4

5

6

7

8

9

10

11

12

4

5

6

7

8

9

10 11 12

ST

1

0.35
0.3

0.8

0.25

0.6

0.2

0.4

0.15
0.1

0.2

0.05

0

0

-0.2

-0.05

-0.4

-0.1
1

2

3

4

5

6

7

8

9

10 11 12

2

3

4

5

6

7

8

9

10 11 12

TP
0.1
0.05
0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
1

Source: IMF staff estimates.

38

2

INTERNATIONAL MONETARY FUND

1

2

3

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Appendix III. Supplementary Figures and Tables to Section C
Table 6. Two-Day Change in 10-Year Bond Rates
Advanced Economies Responses

Monetary Policy Announcement

Systemic 4

United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME…

U.S. U.K.

DE

↓
↓
↓
↓

↓
↓
↓
↓
↓

↑

↑
↓

↑
↓
↑

↓
↓
↓

↓

↓
↑
↓

↓

Periphery EA 2/

↓
↓
↓
↓
↓
↑

↓
↑
↓

↓
↑
↓
↑
↓

↓
↑

↓

European Safe
Havens 3/

Inflation
Targeters 4/

↓
↓

↓
↓
↓
↓

JP

↑
↓
↓

↓

↓
↓
↑
↓

↓

↓

↓
↑

↑
↓

↑

↑

↓
↑
↓

↓
↓
↑

↓
↓
↑

↓

↓

↓

↓

↓

↓

↓

↓
↑
↓

↓
↑
↓

↓
↓
↑

Core EA 1/↓

Emerging Economies Responses

Monetary Policy Announcement

All Emerging

United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME

↓
↓
↓
↑

Latin
America 5/

↓
↓
↓
↓
↓
↑

↑
↑
↓
↓

↑
↑

↓

↓

Asia 6/China & India

Europe 7/

Other
EMs 8/

↓
↓
↓
↓

↑

↓

↓

↓
↑

↓

↑

↑

↑

↑

↓
↑
↑

↓
↑
↑

↓

↑
↓
↓

↑
↑
↑
↓

↓
↓

↓

↓
↑
↓
↓
↓

↑
↓
↓

↓
↓

↓
↓

↓
↓
↓

↓

…

Sources: Datastream, Bloomberg, and staff calculations.

INTERNATIONAL MONETARY FUND

39

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Table 7. Two-Day Change in the Rate of Return of the Stock Market
Advanced Economies Responses
European Safe
Core EA 1/ Periphery EA 2/Havens 3/

Systemic 4

Monetary Policy Announcement

U.S. U.K. DE
United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

↓
↑

↓

↓

↓
↓
↓

↓
↓
↑
↑

↑
↓
↓
↑

↓
↓
↑

Monetary Policy Announcement

↑
↓
↑

↓

↓

↓
↓
↑

↓
↑

↓

↑
↓
↑
↓
↑

↑
↑
↑
↓
↑

↓
↓
↑

↓
↓
↓
↑

↓
↓
↑

↓
↓
↑

↓
↓
↑

↓
↓
↑

↓
↓
↑

↓

↓

↑
↓

↓

↓

↓

Emerging Economies Responses
Latin
Asia 6/China & India
America 5/

↑

↑

↑
↑
↓

↑

↑
↓

↑
↑

↑

↑

↓
↓
↑

↓

↓

↓

↓

Europe 7/

↑

↑
↓

↓

↓

↓

Other
EMs 8/

↑
↓
↑
↑
↓
↑

↓
↓
↓

↓

↓
↑

↓
↓

↓
↓
↑

↓
↓
↑

↓
↓

↓

↓

↓

↓

↑
↑
↓
↓

↓
↓
↑

↓

Sources: Datastream, Bloomberg, and staff calculations.

40

↓
↑
↑
↓
↑
↑

↓
↓
↓
↑
↑

↑

All Emerging
United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

JP
↑

↓
↑

Inflation
Targeters 4/

INTERNATIONAL MONETARY FUND↓↓

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Table 8. Two-Day Change in the Rate of Return of Cross Bilateral Foreign Exchange
Advanced Economies Responses
Systemic 4

Monetary Policy Announcement

U.S. U.K. DE
United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

↓

↓
↓
↓
↓
↓
↓

↓

European Safe
Havens 3/

Inflation
Targeters 4/

↓
↓
↓
↓
↓
↓

↓
↓
↓
↓

↑
↓
↓

↓
↑
↓

Core EA 1/

Periphery EA 2/

↓
↓
↓
↓
↓
↓

JP
↓
↓
↓
↓
↓

↓

↓

↓

↓

↓

↓

↓

↓
↓
↓

↓

↓

↓

↑

↓
↑

↑

↓
↓

↓

↑

↑

↓
↑
↑

↑
↓
↑
Emerging Economies Responses

Monetary Policy Announcement

All Emerging

United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

Latin
America 5/

Asia 6/China & India

↓
↓
↓
↓

Europe 7/

Other
EMs 8/

↓
↓
↓
↑

↑
↓
↓
↑
↑
↓

↑
↓
↓

↓

↓
↓

↑
↓

↑
↓

↑

↑

↑
↑
↓
↓

↑
↓
↑

↓
↓
↑

↑
↑

↓

↓

↓
↓
↑

↓
↓
↑

↑

↓

↑

↑
↓
↑

↓

↓
↓
↑

↑

↑
↓

↓
↑

↑

↑

↑

↑

Sources: Datastream, Bloomberg, and staff calculations.

INTERNATIONAL MONETARY FUND

41

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Table 9. Two-Day Change in Money Market Rates
Advanced Economies Responses
Systemic 4

Monetary Policy Announcement

US
United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

UK

DE

JP

↑

↑

Core EA 1/

Periphery EA 2/

↑

↑

↓

↓

↓

European Safe
Havens 3/

Inflation
Targeters 4/

↑
↓

↑
↓

↑

↓

↑

↓

↓

↓
↓

↑

↑
↓

↑
↓

↓

↓

↓

↓

↓

↓

Emerging Economies Responses

Monetary Policy Announcement

All Emerging

United States
Pre-UMP
Post-UMP
LSAP1A
LSAP1B
LSAP2
TWIST
LSAP3
United Kingdom
Pre-UMP
Post-UMP
APP1
APP2
FLS
Euro Area
Pre-UMP
Post-UMP
OMTJapan
Pre-UMP
Post-UMP
CME
…

Latin
America 5/

↓
↓
↓
↓

Asia 6/China & India

Europe 7/

↓
↓
↓

↓

↓
↓

↑

↓
↓
↑
↓

↓
↓

Other
EMs 8/

↓
↓
↓

↑

↓

↓
↑

↓

↓

↓

↓
↑

↑
↓
↑

↓
↓
↑

↑
↓
↑

↓
↑

↓

↑

↓
↑
↓

↑

↓
↑

↑

Sources: Datastream, Bloomberg, and staff calculations.
Notes: 1/ Core EA comprises: Austria, Belgium, Finland, France, and Netherlands; 2/ Periphery EA comprises: Greece, Ireland, Italy,
Spain, and Portugal; 3/ European Safe Havens comprise Denmark and Switzerland; 4/ Inflation Targeters comprises Australia,
Canada, New Zealand, Norway, and Sweden; 5/ Latin America comprises Brazil and Mexico; 6/ Asia comprises Indonesia, Malaysia,
South Korea, and Thailand; 7/ Europe comprises Czech Republic and Poland; 8/ Other EMs include Russia, South Africa, and Turkey.
A downward (an upward) arrow indicates a fall (an increase) in the money market rates, bond yields, stock returns, or anappreciation (a depreciation) of the foreign currency vis-à-vis the relevant bilateral FX rate (e.g., USD, GBP, EUR or JPY).

42

INTERNATIONAL MONETARY FUND

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 13. Foreign Bond Yields Responses
U.S. Announcements(bps, cumulative)

U.K. Announcements(bps, cumulative)

20

20

10

10

0

0

-60

-30

Other EM

China & India

Latin America

All EM

Eur Safe Havens

AE Infl Targeters

Europe EM

USCore EA

Eur Safe Havens

All EM

Other EM

China & India

Asia EM

Latin America

JP

-6

-2

DE

-4

Asia EM

0Core EA

0

Europe EM-2

AE Infl Targeters

2

UK

2

0

Periphery EA

0

UK

-20
-30

US

4

Periphery EA-10Japan Announcements(bps, cumulative)

4-4

Other EM

-60

Latin America-20

All EM-50

Asia EM-10EA Announcements(bps, cumulative)-2

50

Europe EM

LSAP3

-40

China & India

TWIST

FLS

AE Infl Targeters

-50

LSAP2

Periphery EA

LSAP1B

Eur Safe Havens

LSAP1A

JP

-20
-30

-40

APP2

-10

DE

-30

APP1

Core EA

-20

60

US

-10

China & India

30

0

Eur Safe Havens

30

0

JP

10

Core EA

10

Periphery EA

40Europe EM

40

AE Infl Targeters

20

20

DE

50

UK

30

All EM

30

Asia EM

60

Other EM

40

Latin America

40

-2

-4

-6

-6

-8

-8

-4
-6

OMT

-10

-8

-8

-10

-10

-12

-12

CME

-10

-12

-12

-14

-14

Sources: Datastream, Bloomberg, and staff calculations.

Notes: Core EA comprises: Austria, Belgium, Finland, France, and Netherlands; Periphery EA comprises: Greece, Ireland,
Italy, Spain, and Portugal; European Safe Havens comprise Denmark and Switzerland; Inflation Targeters comprise Australia,
Canada, New Zealand, Norway, and Sweden; Latin America comprises Brazil and Mexico; Asia comprises Indonesia, Malaysia,
South Korea, and Thailand; Europe comprises Czech Republic and Poland; Other EMs comprise Russia, South Africa, and Turkey.

INTERNATIONAL MONETARY FUND

43

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 14. Foreign Equity Prices Response
U.S. Announcements(percent, cumulative)

4

1

1

0

0

1.4

OMT

1.2

Periphery EACore EA

0.0

JP

0.0

US

0.2

AE Infl Targeters

0.2

UK

0.4

Latin America

0.4

HAVEN

0.6

Europe EM

0.6

Other EM

0.8

China & India

0.8

Asia EM

1.0

EM

Asia EMJPAll EM

HAVEN

Europe EM

Japan Announcements(percent, cumulative)

0.0

1.2

1.0

FLS
-5

DE

1.4

APP2

-5

-0.5

Europe EM

EA Announcements(percent, cumulative)

-4
APP1

US

-3

-4

AE Infl Targeters

-3

-3

UK

-2

-2

-3

HAVEN

-1

Core EA

Other EMUK

Latin America

Periphery EADECore EAAE Infl Targeters

All EM

HAVEN

Europe EM

Asia EM-2

China & India

JP

-2

-1

0.0

Other EM

0China & India

0

Asia EM

1

All EM

1

AE Infl Targeters-1

Periphery EA

2Periphery EA

2Latin America

3

US

3

-1

2

LSAP2

Core EA

LSAP3China & India

LSAP1BTWIST

Latin America

LSAP1A

2

DE

4

U.K. Announcements(percent, cumulative)

5

Other EM

5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0

-2.0
CME

-2.5

-2.5

Sources: Datastream, Bloomberg, and staff calculations.

Notes: Core EA comprises: Austria, Belgium, Finland, France, and Netherlands; Periphery EA comprises: Greece, Ireland, Italy,
Spain, and Portugal; European Safe Havens comprise Denmark and Switzerland; Inflation Targeters comprise Australia, Canada,
New Zealand, Norway, and Sweden; Latin America comprises Brazil and Mexico; Asia comprises Indonesia, Malaysia, South Korea,
and Thailand; Europe comprises Czech Republic and Poland; Other EMs comprise Russia, South Africa, and Turkey.

44

INTERNATIONAL MONETARY FUND

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 15. Relevant Cross Foreign Exchange Rates Response
U.S. Announcements(percent, cumulative)3
2

LSAP1A

LSAP1B

TWIST

LSAP3

3

LSAP2
2

-3

1.5

1.0

1.0

0.5

0.5

0.0

0.0

-2

-2.0

Europe EM

AE Infl Targeters

US

JP

EA

All EM

Other EM

Asia EM-1.5

Latin America-1.0

Eur Safe Eur Safe Havenss

-1

-0.5

China & India

0

China & India

Asia EMAll EM

JP

Other EMEA

Latin America-2

AE Infl Targeters-1Europe EM

0

1.5

1

Eur Safe Eur Safe Havenss

1

U.K. Announcements(percent, cumulative)

-0.5
-1.0
-1.5
-2.0

-3
-2.5

-2.5

-4

-4

-5

-5

-3.5

0.4

1.8

Japan Announcements(percent, cumulative)

1.8

1.6

CME

1.6

0.6

0.6

0.4

0.4

0.2

0.2

0.0

0.0

Europe EM

0.8

Latin America

0.0

1.0

0.8

AE Infl Targeters

Asia EM

China & India

All EM

AE Infl Targeters

Other EM

Europe EM

Eur Safe Eur Safe Havenss

EA

JP

UK

US

0.0

1.0

Other EM

0.1

1.2

All EM

0.1

1.2

Asia EM

0.2

Latin America

0.2

1.4

China & India

0.3

Eur Safe Eur Safe Havenss

0.3

-3.0

FLS

1.4

EA

OMT

APP2

-3.5

UK

0.4

APP1

US

EA Announcements(percent, cumulative)-3.0

Sources: Datastream, Bloomberg, and staff calculations.

Notes: EA comprises: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Spain, and Portugal;
European Safe Havens comprise Denmark and Switzerland; Inflation Targeters comprise Australia, Canada, New Zealand, Norway,
and Sweden; Latin America comprises Brazil and Mexico; Asia comprises Indonesia, Malaysia, South Korea, and Thailand; Europe
comprises Czech Republic and Poland; Other EMs comprise Russia, South Africa, and Turkey. A rise (fall) in the cumulative 2-day
window rate of return of the cross FX indicates a depreciation (appreciation) of the foreign currency vis-à-vis the relevant bilateral
FX rate (e.g., USD, GBP, EUR, or JPY).

INTERNATIONAL MONETARY FUND

45

UNCONVENTIONAL MONETARY POLICIES—RECENT EXPERIENCE AND PROSPECTS—BACKGROUND PAPER

Figure 16. Foreign Money Market Rates Responses
U.S. Announcements(bps, cumulative)

100
Latin America

Eur Safe Havens

JP

UK

EA

US

Asia EM

10

5

5

0

0

-10

LSAP1A

LSAP1B

TWIST

LSAP3

LSAP2

-50

EM

Other EM

Europe EM

China & India

-5

-10

-10
APP1

APP2

FLS

-60 -15

40

Asia EM

0
Other EM

0Europe EM

1

All EM

1

China & India

-20

-20

2

AE Infl Targeters

-10

2

UK

China & India

EM

Asia EM

US

UK

0Other EM0

Latin America

10

JP

10

Europe EM

20

Eur Safe Havens

20

EA

30

AE Infl Targeters

30

3

CME

US

OMT

Latin America

40Japan Announcements(bps, cumulative)3

Eur Safe Havens

EA Announcements(bps, cumulative)

-15

EA

-60

-10

Latin America-5

Eur Safe Havens

-40

JP

-40

DE

-30

UK

-20

-30

-50

15

10

US

-20

AE Infl Targeters

EM

China & India

Other EM

-10Europe EM

0

U.K. Announcements(bps, cumulative)

15

AE Infl Targeters

10Sources: Datastream, Bloomberg, and staff calculations.

Notes: EA comprises: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Spain, and Portugal;
European Safe Havens comprise Denmark and Switzerland; Inflation Targeters comprise Australia, Canada, New Zealand,
Norway, and Sweden; Latin America comprises Brazil and Mexico; Asia comprises Indonesia, Malaysia, South Korea, andThailand; Europe comprises Czech Republic and Poland; Other EMs comprise Russia, South Africa, and Turkey.

46

INTERNATIONAL MONETARY FUND