ABSTRACT
Introduction The environment and conduct of monetary policy have drastically changed in this century with the establishment of monetary unions and the adoption of unconventional policies of quantitative easing aimed at combating the financial crisis. Specifically, quantitative easing by the US and the UK, and potentially by the European Central Bank, came immediately in the aftermath of the financial crisis to address its recessionary and deflationary impacts and restore economic growth and price stability. This book analyzes these two new developments in the financial environment and the conduct of monetary policy and their impact on administration and strategy in two chapters. Chapter 8 deals with monetary policy conduct in monetary unions without fiscal unions, emphasizing the monetary policy of the European Central Bank. It also examines central banks’ holdings of foreign currency reserves for precautionary reasons in the wake of the global financial crisis. Meanwhile, the current chapter analyzes the monetary policy of quantitative easing adopted with the advent of the financial crisis to address and reverse its recessionary and deflationary environments. This involves an analysis of the new and unconventional monetary policy, including its background and description; its strategy of instruments-targets-goals; its channels of transmission mechanisms; the experiences of the US and the UK, which were the first two countries to adopt it after the crisis; the assessment of its success based on empirical evidence; and, finally, various exit strategies from quantitative easing on the road to policy normalization. The analysis also addresses the nature of monetary policy when short-term interest rates are zero bound using a money demand and velocity framework. The chapter is organized as follows. The next section describes quantitative easing and its application in the US and the UK. The third section evaluates the transmission mechanisms of unconventional monetary policy, adding the forward guidance and signaling channel to the discussion and providing empirical evidence on various channels. The fourth section adds empirical evidence based on casual empiricism and econometric studies addressing the macroeconomic impacts of the policy on the wider economy to the discussion of the decision to adopt quantitative easing. This is followed by a section dealing with monetary policy when interest rates are zero bound, based on the recent
experience of the US with money demand and velocity. The sixth section discusses exit strategies from quantitative easing and monetary policy normalization, and the last section contains concluding remarks and policy implications.
