benoit cœure : the persistence and signalling power of central bank asset purchase programmes speech by mr benoit cœure, member of the executive board of the european central bank, at the 2018 us monetary policy forum, new york city, 23 february 2018. * * * accompanying slides the financial crisis has seen central banks launch asset purchase programmes of unprecedented scope and scale, so as to provide additional policy stimulus as interest rates approached the lower bound. this period has yielded many insights into how these programmes work and their various channels of transmission. 1 but one question that has remained open is the relative importance of their “ stock ” and “ flow ” effects. the issue is not so much about which of the two effects dominates. the literature is fairly clear on this : there are sizeable announcement effects related to the stock of purchases, and these effects materialise whenever investors receive new information about the parameters of the purchase programme, such as its size, duration and composition. the actual impact of purchase operations on yields has been found to be less in comparison. 2 the issue is rather if it matters how a given stock of purchases is built up, and how this building up interacts over time with the other elements of the monetary policy stance. this is especially important for the ecb today because, as we said in our latest introductory statements, our monetary support currently comprises three components : first, net asset purchases ; second, the stock of acquired assets and forthcoming reinvestments ; and third, our forward guidance on interest rates. i would therefore like to use my remarks today to explore two aspects of implementing asset purchase programmes where i still see open questions. my focus will be on the closed economy dimension of such operations, having addressed their international spillovers elsewhere. 3 the first aspect relates to the interaction between interest rate forward guidance and asset purchases. specifically, for a given policy intention, are policymakers able to choose the relative intensity with which they use each of these instruments? in other words, under what conditions will they become substitutes rather than complements? the second aspect relates to the persistence of the effects of asset purchases. does the stock effect appear mainly at the time of the announcement and then fade as new shocks occur? or does it accumulate as the size of the central bank ’ s portfolio rises, meaning its effect can grow even as the flow of purchases is reduced? i intend to argue that, at least in the euro area, empirical evidence suggests that the amount of purchases needed to deliver a given compression of

, london, 1873 ; humphrey, t. “ the classical concept of the lender of last resort ”, economic review, 61, 2 – 9, 1975 ; and freixas, x., parigi b., and j. - c. rochet “ the lender of last resort : a 21st century approach ”, journal of the european economic association, 2 : 1085 – 1115, 2004. bis central bankers ’ speeches fixed - rate, full allotment regime in its refinancing operations, offering unlimited liquidity to banks at a predictable cost against an expanded set of eligible collateral. the widening of collateral might be seen as a way to mitigate the adverse and destabilizing effects of shortterm funding “ runs ” relating to a deterioration of asset liquidity, but it can also be seen as a way to prevent large recourse to central bank liquidity by banks, who would otherwise be subject to funding outflows at a later stage of the crisis. such a widening has to be accompanied by proper risk management measures, such as haircuts, to mitigate the increase of the risk profile of the central bank. the challenge for the central bank is to “ buildin ” the possibility to expand the set of eligible collateral while mitigating the incentives for banks to abuse it. 20 similarly, the lolr ’ s function of providing emergency liquidity assistance has been criticised for provoking moral hazard by banks. indeed, support that is considered as appropriate during the crisis might have perverse effects on the incentives of banks at a later stage. banks may ex ante decide to take an excessive exposure to risk, knowing that the central bank will intervene if that risk materialises. moreover, there is a fine line between liquidity and solvency needs, which in a crisis is often blurred. central banks should therefore be particularly wary not to substitute for capital support that should be provided by shareholders, investors, or in last resort by governments. when such moral hazard problems are severe, the central bank might consider mitigating but not eliminating the externalities of a liquidity crisis – that is, not helping barely solvent banks and thus providing incentives for banks to conduct business in safe and sound manner. 21 the challenge for the central bank is to find the appropriate balance between preserving financial stability and imposing discipline for the future. while the new set of liquidity standards requires banks to hold sufficient liquid assets in good times to meet their out