What Is Non-Standard Monetary Policy?

A non-standard monetary policy—or unconventional monetary policy—is a tool used by a 澳洲幸运5官方开奖结果体彩网:central bank or other monetary authority that falls out of line with traditional measures. Non-standard monetary policies came to prominence during the 澳洲幸运5官方开奖结果体彩网:2008 financial crisis when the primary means of traditional monetary policy, which is the adjustment of interest rates, was not enough. Non-standard monetary policies include quantitative easing, forward guidance, and💞 collateral adjustments.

Understanding Non-Standard Monetary Policy

Monetary policy is used in either a 澳洲幸运5官方开奖结果体彩网:contractionary form or an 澳洲幸运5官方开奖结果体彩网:expansionary form. When an economy is in trouble, such as a recession, a country's central bank will implement an expansionary monetary policy. This includes the lowering of interest rates to make money cheaper to encoura𓃲ge spending in the econo🦩my.

An expansionary monetary policy also reduces the 澳洲幸运5官方开奖结果体彩网:reserve requirements of banks, which increases the 澳洲幸运5官方开奖结果体彩网:money supply in the economy. Lastly, central banks purchase Treasury bonds on the open market, increasing the cash reserves of banks. A co🦄ntractionary monetary policy would entail the sameᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ actions but in the opposite direction.

During the 2008 financial crisis, global economies were looking to pull their countries out of recessions by implementing expansionary monetary policies. However, because the recession was so bad, standard expansionary monetary policies were not enough. For example, interest rates were dropped to zero or near zero to fight the crisis. This, however, was not enoug💮h to improve the economy.

To complement the traditi𒆙onal monetary policies, central banks implemented non-standard measures to pull their economies out of financial distress.

The Fed put into place various aggressive policies to prevent even more damage from the economic crisis. Similarly, the 澳洲幸运5官方开奖结果体彩网:European Central Bank (ECB🗹) implemented negative interest rates and conducted major asset purchases in order to help stave off the effects of the global economic downturn. 

Types of Non-Standard Monetary Policies

Quantitative Easing

During a recession, a central bank can buy other securities in the open market outside of government bonds. This process is known as 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE), and it is considered when short-term interest rates are at or near zero, just as they were during the Great Recession. QE lowers interest rates while increasing the mo🧜ney supply. Financial institutions are then flooded with capital to promote lending and liquidity. No new money is printed during this time. 

During the recession, the U.S. Federal Reserve began buying 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities (MBSs) as part of its quantitative easing program. During its first round of QE, the central bank purchased $1.25 trillion in MBS. As a result of its QE program, the Fed's balance sheet swelled from about $885 billion before the recession to $2.2 trillion in 2008 where it leveled out to about $4.5 trillion in 2015.

Forward Guidance

澳洲幸运5官方开奖结果体彩网:Forward guidance is the process by which a central bank communicates to the public its intentions for future monetary policy. This notice allowꦅs both individuals and businesses to make spending and investment decisions for the long-term, thereby bringing stabi𝔍lity and confidence to the markets. As a result, forward guidance impacts the current economic conditions.

The Fed first used forward guidance in the early 2000s and then during the 澳洲幸运5官方开奖结果体彩网:Great Recession to indicate that interest rates would remain at low levels for the foreseeable future.

Negative Interest Rates

Many countries adopted 澳洲幸运5官方开奖结果体彩网:negative interest rates during the financial crisis. In this policy, central banks charge commercial banks an inte🙈rest rate on their deposits. The goal is to entice commercial banks to spend and lend their cash reserves rather than storing ▨them. The storing of cash reserves will lose value due to the negative interest rate.

Collateral Adjustments

During the financial crisis, central banks also expanded the scope of what assets were allowed to be held as 澳洲幸运5官方开奖结果体彩网:collateral against lending facilities. Typically, the most 澳洲幸运5官方开奖结果体彩网:liquid assets should be held as collateral, however, in such difficult times, more illiquid assets were 🃏allowed to be held as collateral. Central banks then assume the liquidity risk of these assets.

Criticism of Non-Standard Monetary Policy

Non-standard monetary policies can have negative impacts on the economy. If central banks implement QE and increase the money supply too quickly, it can lead to 澳洲幸运5官方开奖结果体彩网:inflation. This can happen if there is too much money in the system but only a certain amount of 🍬goods available.

Negative interest rates can also have consequences by encouraging people not🐬 to save and rather to spend their money. Furthermore, QE increases the balance sheet of a central bank, which can be a risk to manage, and also inadvertently💎 determines the types of assets available to the private sector, possibly leading it to purchase more risky assets if the Fed is buying up tremendous amounts of Treasuries and MBSs.