Central Bank Liquidity Management and "Unconventional" Monetary Policies

By García-Cicco, Javier; Kawamura, Enrique | Economia, Fall 2014 | Go to article overview

Central Bank Liquidity Management and "Unconventional" Monetary Policies


García-Cicco, Javier, Kawamura, Enrique, Economia


Central banks that work under an inflation-targeting regime generally use an interest rate as the main instrument to implement monetary policy. The latter can be denominated conventional monetary policy. Central banks often deviate from this practice, however, and engage in other policies to deal with particular situations. As these alternatives depart from the usual practice, they are generally labeled "unconventional" policies.

During the recent global financial crisis and recession of 2008-09, central banks around the world and in Latin America, in particular, responded to exter- nal shocks in a variety of ways. Canales-Kriljenko and others provide a precise description of how different Latin American central banks reacted to the U.S. financial crisis shock in 2008, with an emphasis on the heterogeneity in the use of unconventional monetary policy instruments.1 For example, while Colombia and Peru lowered reserve requirements in their banking systems, the Central Bank of Chile relaxed the collateral requirements for repurchase (repo) transac- tions.2 Also, Chile and Peru extended the repayment period in repo transactions. These examples illustrate not only the heterogeneity in responses, but also the prevalent use of unconventional instruments. Ishi, Stone, and Yehoue note that the central bank interest rate increased rather than decreased in many emerging countries in the months immediately following the fall of Lehman Brothers.3

Deviations from conventional policies were observed in Latin America even before the recent global financial crisis (and before the central banks implemented inflation-targeting frameworks). Most notably, central banks have often engaged in sterilized exchange rate interventions to smooth the effects of capital inflows (due in part to commodity price booms) and the resulting nominal exchange rate appreciation. Some countries, like Peru, have used these inter- ventions quite frequently, whereas others have implemented these policies only after extreme movements in the nominal exchange rate (for instance, in Chile), even after the inflation-targeting policies were already in place.

In this regard, one important policy discussion is the relationship between inflation-targeting regimes and liquidity management responses.4 In particular, it is not obvious whether the application of such liquidity management policies implied some type of threat to the "good implementation" of the inflation- targeting framework. Ishi, Stone, and Yehoue highlight the difficulties of using econometric time-series techniques to evaluate the impact of liquidity man- agement policies implemented in an inflation-targeting framework, because it requires disentangling the impact of each type of policy, as well as the impact of the external shocks that presumably triggered the implementation of such policies.5 The fact that such policies were usually in place for just a few quarters further complicates the application of the time-series-based impact evaluation.

This paper contributes to the evaluation of such policies by constructing, solving, and simulating a dynamic stochastic general equilibrium (DSGE) model that explicitly includes the central bank's balance sheet as a key modeling input. The model can explicitly predict the impact of selected unconventional monetary policies on the major macroeconomic variables, including gross domestic product (GDP), consumer price index (CPI) inflation, and the real exchange rate, and it pays special attention to the role played by the specific facilities used by the central bank to manage market liquidity. This paper uses Chile as the main case for the application of the model, providing a detailed account of its experience with these alternative tools since the introduction of the flexible inflation-targeting framework in 1999 and calibrating the model to then analyze the effects of some of the policies implemented.

The theoretical framework is an extension of a New Keynesian model of a small open economy with banks that take deposits from households (which is the only way for the latter to finance consumption, extending the more traditional cash-in-advance assumption), borrow abroad, lend to productive firms, and hold bonds issued by the central bank. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Central Bank Liquidity Management and "Unconventional" Monetary Policies
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.