What is the impact of changes in the ECB's unconventional monetary policy transmission mechanism on the exchange rate fluctuations of the euro?
preface
After 2008, the financial crisis plunged the economies of various countries into recession, and conventional monetary policy could no longer achieve the intended policy objectives, and unconventional monetary policy began to be frequently used to regulate the economic order of the financial market and stimulate economic recovery.
So how does the ECB use its own transmission mechanism to regulate the euro exchange rate?
Unconventional monetary policy refers to an extension and innovation of existing monetary policy under the condition that conventional monetary policy cannot effectively play its role in operating and guiding the financial market.
The main purpose of conventional monetary policy use is policy objectives such as price stability, full employment and balance of payments.
The specific implementation process of conventional monetary policy is that the central bank announces its designated policy interest rate, and then uses open market operations or other monetary policy tools to cause the benchmark interest rate to fluctuate around the policy rate.
Through the transmission of interest rate term tools in the money market and credit market, the policy interest rate can effectively affect the long-term interest rate of the entire financial market, so as to achieve policy goals such as affecting the operation of the financial market and the real economy.
Under the condition of stable and normal operation of the financial market and economic order, the conventional monetary policy implemented by the central bank has good results, and to a certain extent, it can effectively achieve its policy objectives, regulate the operation of the financial market system and the real economy, and play a positive role in stabilizing prices.
In the extreme context of the financial crisis, it is inevitably difficult for the conventional monetary policy implemented by the central bank to achieve the desired policy objectives.
Low interest rate policies tend to have a positive impact on economic output initially, but sustained low interest rate policies will make it impossible for economies to lower nominal interest rates.
When the nominal interest rate is low, the central bank may enter the zero interest rate trap, and the long-term low interest rate policy will bring higher financial systemic risks, so as to cause financial market instability, and the transmission mechanism of the policy cannot achieve the original implementation effect.
In a special context, and in order to overcome the negative impact of the zero interest rate floor and the failure of the transmission mechanism of policy instruments, it is necessary for central banks to seek and adopt unconventional monetary policy measures.
The Long-Term Refinancing Program (LTRO) is one of the means by which the Eurosystem operates in the open market, and was originally established to improve longer-term refinancing facilities for specific market participants who are unable to participate in the interbank market or have higher thresholds.
The LTRO allows eurozone countries, especially heavily indebted countries, to lend unlimited amounts to eurozone banks by pledging their sovereign debt, and encourages banks to buy their own government bonds by fixing lending rates.
LTRO generally uses a pre-declared amount of money allocation and variable interest rate bidding scheme for financing, which not only ensures that the amount of financing meets the liquidity needs of financial institutions, especially banks, but also reduces the operational risks that occur when the banking system issues loans.
Eurozone countries, especially heavily indebted countries, have the characteristics of low liquidity during the financial crisis, and LTRO can increase the willingness of banks to lend based on the credit of the central bank, and indirectly increase the liquidity of the currency and debt of heavily indebted countries.
The LTRO, adopted by the ECB between 2009 and 2015, injected trillions of euros into banks, somewhat slowed the worsening of the financial crisis, repaid some of the bank's debt and revived market confidence by reducing financing costs.
Although the stimulating effect on the real economy remains to be seen, it has also played a role in restoring the function of the money market and improving the flow rate of bank funds.
Enhanced Credit Support (ECS) is to strengthen the LTRO by extending the operating period of the plan and relaxing the scope of application of collateralized assets on the basis of the long-term refinancing plan (LTRO), so that the banking system can receive liquidity support with a longer maturity on the original LTRO.
Under the ECB's minimum reserve system, financial institutions will solve the problem of liquidity surplus and liquidity shortage by lending funds.
While allowing financial institutions to obtain certain benefits, it also satisfies the support for their liquidity shortage.
However, after the outbreak of the financial crisis, mutual trust between financial institutions decreased, and banks with liquidity shortages could not smoothly obtain funds from banks with surplus liquidity through capital lending.
As a result, the cost of financing between them has increased, and the stability of the entire financial market has been affected. To this end, the ECS launched by the European Central Bank increases credit for other financial institutions such as banks with liquidity shortages while ensuring the normal transmission of interest rate policy in the money market.
The ECB's ECS has had a certain impact on interest rates, bank liquidity management and the stability of financial markets, which has not only re-stimulated household lending, but also eased the downward trend in corporate lending.
Due to the financial crisis, the liquidity of financial assets of heavily indebted countries has decreased, financing costs have increased, and in order to avoid the amplification effect caused by market panic to form a vicious circle, bonds issued by heavily indebted countries have been used by the European Central Bank as the main targets of the CBPP.
The aim is to ease the enormous debt pressures of these countries on the basis of increasing the liquidity of financial markets.
To encourage financial institutions to purchase heavily indebted bonds, the ECB provides credit guarantees to heavily indebted countries in the eurozone.
The ECB purchased a total of $100 billion in guaranteed bonds during the two rounds of CBPP in May 2009 and June 2010.
To a certain extent, such measures have boosted economic confidence, reduced the risk of deflation, and led the economy to a virtuous circle.
summary
The process of CBPP belongs to indirect financing channels, which only plays a guiding effect of policy in unconventional monetary policy, and the number and structure of assets purchased by financial institutions of heavily indebted countries are determined by various factors such as the characteristics of the institution itself and whether the market is optimistic about the future economy, so the direct policy effect of CBPP is limited.
