During periods of extreme economic crisis, traditional monetary policy tools may no longer be effective in achieving their goals. Unconventional monetary policy, such as 澳洲幸运5官方开奖结果体彩网:quantitative easing, may then be employed toꩵ jump-start economic growth and spur demand.

Brief Overview of Conventional Monetary Policy

When a nation’s economy becomes “overheated”—growing rapidly to the point that inflation increases to dangerous levels—the 澳洲幸运5官方开奖结果体彩网:central bank will enact restrictive monetary polic⛎y to tighten the money supply. This effectively reduces the amount of money in c🍎irculation and the rate at which new money enters the system.

Raising the target interest rate makes money more expensive and increases borrowing costs, reducing the demand for cash and cash instruments. The bank may increase the level of reserves that commercial and retail banks must keep on hand, limiting their ability to generate new loans. The central bank can also sell 澳洲幸运5官方开奖结果体彩网:government bonds from its balance sheet in the open market, exchanging those🅰 bonds by taking in mo🐎ney from circulation.

When a nation’s economy slips into 澳洲幸运5官方开奖结果体彩网:recession, these policy tools can be operated in reverse, constituting a l💝oose or expansionary monetary policy. Interest rates are lowered, reserve limits are loosened, and instead of selling bonds in the open market, they are purchased in exchange for newly created money.

Unconventional Monetary Policy Tools

The problem with conventional monetary tools in periods of deep recession or economic crisis is that they become limited in their usefulness. Nominal interest rates are effectively bound by zero, and bank 澳洲幸运5官方开奖结果体彩网:reserve requirements cannot be made so low that those banks risk default. Once interest rates are lowered close to zero, the economy also risks falling into a 澳洲幸运5官方开奖结果体彩网:liquidity trap, where people are no longer incentivized to inves👍t and instead hoard money, preventing a recover🎐y from taking place.

That leaves the central bank to expand the money supply through 澳洲幸运5官方开奖结果体彩网:open market operations (OMO). In periods of crisis, however, 澳洲幸运5官方开奖结果体彩网:government securities tend to become bid up due to their perceived safety, which limits their effectiveness as a policy tool. Instead of buying government securities, the central bank can purchase other securities in the open market outside of government bonds. This is often 澳洲幸运5官方开奖结果体彩网:referred to as quantitative easing (QE).

Normally, nongovernment securities markets operate free from intervention by the central bank, which decides to purchase these securities only in times of need. The types of securities purchased during a round of QE are typically bonds or 澳洲幸运5官方开奖结果体彩网:debt instruments owned by financial institutions, including 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities (MBS).

QE can also take the form of buying long-term bonds while selling 澳洲幸运5官方开奖结果体彩网:long-term debt in order to influence the 澳洲幸运5官方开奖结果体彩网:yield curve in an attempt to prop up housing markets, which are financed by long-term mortgage debt. When the central bank begins buying private assets like 澳洲幸运5官方开奖结果体彩网:corporate bonds, it is sometimes referred to as 澳洲幸运5官方开奖结果体彩网:credit easing.

Other Routes

If the usual QE attempts fail, a central bank can take the more unconventional route of trying to prop up 澳洲幸运5官方开奖结果体彩网:equity markets by actively purchasing shares of stocks on the open market. During the years after the 澳洲幸运5官方开奖结果体彩网:financial crisis, central banks💮 around the world dᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚid, in fact, engage in equity markets to some degree.

The central bank can also signal to the public its intentions to keep interest rates low for prolonged periods of time or that it will engage in new rounds of QE in an attempt to boost investor confidence, which can trickle down to the broader economy to promote demand.

If all else fails, the bank can attempt to institute a 澳洲幸运5官方开奖结果🧜体彩网:negative interest rate policy (NIRP), whereby instead of paying interest on deposits, depositors will have to pay for the privilege of keeping money at a bank. The idea is that people will prefer to spend or invest that money instead of being penalized for holding on to it. This sort of policy can be very d🦂angerous, howꦐever, as it can punish savers.

The Bottom Line

Central banks enact monetary policy to change the size of the money supply and its rate of growth. This is normally done through interest rate targeting, setting bank reserve requirements, and engaging in open market operations with government securities. In periods of severe economic downturn, these tools become limited as interest rates approach zero and 澳洲幸运5官方开奖结果体彩网:commercial banks become worried about 澳洲幸运5官方开奖结果体彩网:liquidity.

Engaging in open market operations with instruments other than government bonds, such as mortgage-backed securities, can help in these situations. This is referred to as quantitative easing (QE). When QE is not enough, the bank can enter other markets and signal to the market that they will engage in an 澳洲幸运5官方开奖结果体彩网:expansionary policy for a long period of time or even resort to implementing a negative 澳洲幸运5官方开奖结果体彩网:nominal interest rate.