Balance sheet measures can be roughly 3/9  BIS central bankers' speeches  divided into two categories: purchases of long-term bonds and long-term extraordinary loans for banks. The objective of this balance sheet policy has been to further reduce the cost of long-term loans. The measure that has attracted most attention is central banks’ government bond purchases, frequently referred to as quantitative easing, or QE. The purchases pull up prices and reduce yields on these bonds. To the extent that the sellers of the bonds shift their demand towards other riskier securities, the yields on these securities could also fall. Central banks’ government bond purchases can also function as a signal that policy rates will remain low. Studies suggest that this policy has had an appreciable effect on interest rates and financial prices.5 The alternative monetary policy instruments have most probably also stimulated economic activity, pushed up inflation expectations and underpinned bank lending.6 However, it is difficult to estimate the strength and persistence of these effects more precisely. The choice of method and assumptions affect the results, and estimates diverge widely. A range of studies point out that unconventional monetary policy instruments are most effective in the context of market imbalances and when risk premiums are high. The effect appears to have diminished as interest rates and risk premiums have fallen or as policy rates have approached their lower effective bound.7 In the current environment of very low interest rates in many countries and prospects for slower growth, this gives cause for concern.

However, this provision does not prohibit Norges Bank from purchasing government bonds in the secondary market. Nevertheless, there is much to suggest that the purchase of government bonds is not an option as a policy instrument for Norges Bank. There a number of reasons for this. As I mentioned previously, floating-rate loans dominate the Norwegian credit market. Unlike other countries, the level of long-term interest rates in itself has little effect on credit demand in Norway. If government bond purchases do not affect future short-term interest rate expectations either, the effect on Norway’s wider economy will be limited. Studies in other countries do not provide an unequivocal answer as to whether the bond purchases have had the strongest impact through a fall in the expected policy rate or through lower term premiums on long-term 4/9  BIS central bankers' speeches  government bonds. We have seen in earlier periods that fluctuations in Norwegian government bond yields do not necessarily influence other interest rates. There were signs of strong demand for Norwegian government bonds during the euro crisis between 2011 and 2012. Government bond yields fell fairly sharply in this period, primarily as a result of lower term premiums, but did not feed through to any great extent to the interest rates that are important for banks’ funding costs. Chart: Yields on government bonds, swaps and covered bonds Other countries’ government bond yields play an important role as a reference for other interest rates, which is not the case for Norway.