Efficacy of monetary policy under uncertainty

In this post, I am going to talk about the efficacy of monetary policy in the face of uncertainty. 

In an earlier post, I have talked about uncertainty reducing interest rate sensitivity – but does that mean that the efficacy of monetary policy has declined? No, as ultimately, we need to think about how any investment response translates into a change in output!

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Six methods of unconventional monetary policy

In a recent response to questions, The Reserve Bank of Australia has listed six options of unconventional monetary policy that is considered in an event of extreme policy implementation. Westpac economists have also talked about potential unconventional monetary policy tools applicable to the NZ case here – this is worth a read, but is a different list!

In this post I would like to outline the RBA’s options and hopefully make them easy to understand.

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What is the difference between sterilized and unsterilized intervention?

Recently I’ve been trying to get my head around the difference between a “sterilized” asset purchase by a central bank and an “unsterilized” purchase. Here is where I’ve gotten to – happy for any comments or clarifications!

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A New GDP measure (GDP-B) in a digital economy

Although GDP is a good measure of what it is supposed to measure, there are always questions about whether it is the right measure when asking a given policy question. This was the driving motivation behind the Living Standard’s Framework and the development of a suite of measures to inform our views on wellbeing, as I’ve previously written (with Anita King and Nairn MacGibbon).

The focus of this post is on digitization. In an era of digitization, economists have become more and more concerned about whether the conventional way of calculating GDP is appropriate for asking questions about changes in consumer welfare (surplus) through time.

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How does uncertainty affect economy? What about monetary policy?

Why uncertainty matters?

The OECD has been warning everyone (Economic outlook 2019) , that the trade policy tension and uncertainty around it hit global economy hard. My question is, how can we think about uncertainty and its influence on monetary policy?

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Forward guidance and unconventional monetary policy in NZ?

Forward guidance and unconventional monetary policy

I recently noticed that swap rates purchases were discussed as an unconventional monetary policy tool are discussed in Reserve Bank’s bulletin “Aspects of implementing unconventional monetary policy in New Zealand”.

Namely, they state:

Purchasing interest rate swaps could be a way to signal that the Reserve

Bank expects to keep the OCR low for a prolonged period. Swap rates

comprise the expectations of future policy rates, the term risk premium,

and margin for bank credit risk.”

So why would we want to keep OCR persistently low in long-term? Let’s have a closer look at this.

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