Posts in Monetary Policy
The BOJ and the Fed - What's the Story Again?

A number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.

The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.

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Asia, Global Economy, Monetary Policy, Markets and Tradingclaus vistesenAlpha SourcesFed Watch, Fed, Federal Reserve, BOJ, EM
Do or die for the Reverse Twist story

Investors are beginning to get seriously interested in the idea that the BOJ and the ECB will change the composition of their bond purchases to steepen the yield curve. In effect, this would be the opposite of the Fed’s Operation Twist, which saw QE purchases concentrated on the long-end, chiefly to lower the yield on mortgage-backed securities. I think this story, at least partly, is to blame for the recent nudge higher in global bond yields. But we will know soon enough. This week's BOJ meeting should give us a hint of whether this narrative has any legs. 

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Asia, China, Global Economy, International Trade, International Trade and Economics , Markets and Trading, Monetary Policyclaus vistesenOperation Twist, Reverse Twist, BOJ, ECB, Equities, Markets, Macro Man, macroeconomics, globalisation
The (Impossible) Economics of Helicopter Money

Interest rates were first slashed to zero, then came successive rounds of QE, and most recently the ECB has led the world's central banks into the netherworld of negative interest rates. Neither of these tools, however, have worked completely according to central banks’ and governments’ wishes. Unless you have been living under a rock, you will have noticed that "helicopter money" has been touted as the next policy tool which central banks will deploy in their attempt to reach their "targets." 

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Economic Theory and Acadmics, Eurozone watch, Global Economy, Monetary Policyclaus vistesenEurozone monetary policy, Helicopter Money, Paul Krugman, Simon-Wren Lewis, Virtual currency, Wilhelm Buiter, ZIRP, liquidity trap, zero bound
Are Negative Interest Rates Ineffective?

The European Central Bank initially received praise for its decision to push the deposit rate below zero as part of its truly unconventional monetary policy. The euro plunged, equities recovered, and euro area manufacturing outperformed its global peers.

Holders of long-term benchmark bonds have been handsomely rewarded by the ECB’s monetary policy experiment as 10-year yields in Germany have resumed their violent decline. And investors expect more, judged by the decline in short-term yields indicating a further interest-rate cut in March of at least 0.2 percentage points.

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Eurozone watch, Monetary Policyclaus vistesenECB, negative interest rates