Yield curve as the operational target of the monetary policy: history and policy retrospects

XU Zhong1 JI Min1 LI Hongjin1

(1.Research Bureau, People’s Bank of China)

【Abstract】This paper drew on the historical lessons of three of the US’ yield curve-based monetary policy adjustments as well as Japan’s yield curve control policy from September 2016. Analysis of backgrounds, policy implementation processes and policy effects of those adjustments shows that the yield curve-based monetary policy faces many challenges. For instance, policies that suit times of war and crisis do not necessarily work in normal times. The fiscal dominance of monetary policy jeopardizes policy coordination and threatens the independence of central banks. Private firms may be squeezed out, and it will become more difficult for unconventional policies to gradually exit. The yield curve-based monetary policy can be used in times of crisis, but it does not fit China’s situation. The overnight market rate should be fixed as the new policy target rate of the price-based monetary policy, interest rate policymaking rules that fit China’s situation should be explored, and the smooth transition of the monetary framework should be promoted to achieve healthy economic and financial development.

【Keywords】 yield curve control; operation twist; medium-term policy rate; monetary price control;

【DOI】

【Funds】 Key Project of National Natural Science Foundation of China (71733004) National Social Science Funds of China (18VSJ074)

Download this article

    Footnote

    [1]. [1] Kuroda, H., “Speech at Monetary Policy Release,” Bank of Japan, Sep. 21, 2017; Dec. 21, 2017; Jan. 23rd, 2018. [^Back]

    [2]. [2] Humpage, O., “The Fed’s Yield-Curve-Control Policy,” Federal Reserve Bank of Cleveland, Economic Commentary, No. 2016-15, 2016. [^Back]

    [3]. [3] www.pbc.gov.cn[2015-10-26] [^Back]

    [4]. [4] Sun, G. & Duan, Z. China Economic Quarterly (经济学(季刊)), (1): 349–370 (2016). [^Back]

    [5]. [1] Gray, S. and N. Talbor, “Monetary Operations,” Handbooks in Central Banking, Bank of England, No. 24, 2006; Allen, W., “Quantitative Monetary Policy and Government Debt Management in Britain since1919,” Oxford Review Of Economic Policy, 28(4): 804–836, 2012. [^Back]

    [6]. [2] This section mainly refers to Meulendyke’s detailed descriptions of the policy operation of the Federal Reserve and its relationship with the Treasury since its establishment (Meulendyke, A., US Monetary Policy and Financial Markets, New York: Federal Reserve Bank of New York, 1998) and the monetary policy memorandum of June 2003 released by the FOMC Secretariat in April 2016 (Chaurushiya, R. and K. Kuttner, “Targeting the Yield Curve: The Experience of the Federal Reserve, 1942–51,” FOMC Memos, June, 18th, 2003. Public Released on April, 15th, 2016). [^Back]

    [7]. [1] Hetzel, R. and R. Leach, “The Treasury-Fed Accord: A New Narrative Account,” Federal Reserve Bank of Richmond, Economic Quarterly, 87(1): 33–55, 2001. [^Back]

    [8]. [1] Although the Federal Reserve adopted the “bills only” policy after the 1951 Accord and focused more on short-term interest rates, it was still deeply concerned about how the Treasury should feel about the yield curve in practice and tended to slow down whenever the yield curve might be affected, which was known as “even keel.” It was not until 1975 when the Treasury auctioned all its bonds that the Federal Reserve was freed from the shackles of the Treasury ultimately. During the period of active monetary policy from 1951 to 1969, the Federal Reserve adopted the mode of multiple targets of operation and even once employed eight operating targets of monetary policy simultaneously in the 1960s. See Meulendyke, A., US Monetary Policy and Financial Markets, New York: Federal Reserve Bank of New York, 1998; Bindseil, U., Monetary Policy Implementation: Theory, Past and Present, New York: Oxford University Press, 2004. [^Back]

    [9]. [2] Modigliani, F. and R. Sutch, “Innovations in Interest Rate Policy,” American Economic Review, 56(1/2): 178–197, 1966; Modigliani, F. and R. Sutch, “Debt Management and the Term Structure of Interest Rates,” Journal of Political Economy, 75(4): 568–589, 1967. [^Back]

    [10]. [3] Swanson, E., “Let’s Twist Again,” Brookings Papers on Economic Activity, 42(1): 151–207, 2011. [^Back]

    [11]. [4] McCauley, R. and K. Ueda, “Government Debt Management at Low Interest Rates,” BIS Quarterly Review, June, 35–51, 2009; Meaning, J. and F. Zhu, “The Impact of Federal Reserve Asset Purchase Programmes,” BIS Quarterly Review, March, 23–30, 2012. [^Back]

    [12]. [1] Over the entire course of operation, the Federal Reserve made a swap of a total of USD 8.8 billion in long-term treasuries. Within the Federal Reserve, the OT policy of short- and long-term debt swaps is called operation nudge. See Meulendyke, A., US Monetary Policy and Financial Markets, New York: Federal Reserve Bank of New York, 1998. [^Back]

    [13]. [2] Bowman, D., C. Erceg and M. Leahy, “Strategies for Targeting Interest Rates Out the Yield Curve,” FOMC Memos, October, 3rd, 2010. Public Released on January, 29th, 2016; Bowman, D., M. Kiley, A. Levin, S. Meyer, W. Nelson and D. Reifschneider, “Potential Monetary Policy Tools to Provide AdditionalAccommodation,” FOMC Memos, August, 3rd, 2011. Public Released on March, 31th, 2017. [^Back]

    [14]. [1] Borio, C. and A. Zabai, “Unconventional Monetary Policies,” BIS Working Paper, No. 570, 2016; Foley-Fisher, N., R. Ramcharan, and E. Yu, “The Impact of Unconventional Monetary Policy on Firm Financing Constraints: Evidence from the Maturity Extension Program,” Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, No. 2016-025, 2016. [^Back]

    [15]. [2] Meaning, J. and F. Zhu, “The Impact of Federal Reserve Asset Purchase Programmes,” BIS Quarterly Review, March, 23–30, 2012. [^Back]

    [16]. [3] Hamilton, J. and J. Wu, “The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment,” Journal of Money, Credit and Banking, 44(1): 3–46, 2012; Bonis, B., J. Ihrig and M. Wei, “The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates,” Board of Governors of the Federal Reserve System, FEDS Notes, April, 20th, 2017. [^Back]

    [17]. [4] Carpenter, S., J. Ihrig, D. Leonard and P. McCabe, “Reducing the IOER Rate,” FOMC Memos, August, 3rd, 2011. Public Released on March, 31th, 2017. [^Back]

    [18]. [5] See “Comprehensive Assessment: Developments in Economic Activity and Prices as well as Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing” issued by the Bank of Japan on September 21, 2016, www.boj.or.jp [2016-09-21]. [^Back]

    [19]. [1] Amamiya, M., “History and Theories of Yield Curve Control,” Keynote Speech at the Financial Markets Panel Conference to Commemorate the 40th Meeting, Jan. 11th, 2017. [^Back]

    [20]. [2] Kuroda, H., “Outlook for Economic Activity and Prices and Monetary Policy,” Speech at a Meeting Held by Research Institute of Japan, Bank of Japan, May, 10th, 2017. [^Back]

    [21]. [3] Iwata, Kazumasa, Samikawa, I., Takahashi, E. and T. Kimotsuki, “Risks from Extending the QQEPolicy,” Japan Centre for Economic Research (JCER), Financial Research Paper, No. 32, 2016; Fudea-Samikawa, I. and T. Takano, “Pace of Increase in BOJ’s Holding of JGBs Slowing,” Japan Centre for Economic Research (JCER), Financial Research Paper, No. 34, 2017. [^Back]

    [22]. [4] Shirai, S., “International Policy Coordination,” Remarks at the Panel Discussion organized by the Lujiazui Form, June, 13rd, 2016; Shirai, S., “Super-easy Monetary Policy and Reflating Japan’s Economy,” VOX CEPR’s Policy Portal, Mar. 17th, 2017. [^Back]

    [23]. [1] Bindseil, U., Monetary Policy Implementation: Theory, Past and Present, New York: Oxford University Press, 2004. [^Back]

    [24]. [2] Keynes, J., “An Open Letter to President Roosevelt,” Written on Dec., 16th and Published on Dec., 31st, 1933. [^Back]

    [25]. [3] Eggertsson, G. and M. Woodford, “The Zero Bound on Interest Rates and Optimal Monetary Policy,” Brookings Papers on Economic Activity, 34(1): 139–233, 2003; Bernanke, B., V. Reinhart and B. Sack, “Monetary Policy Alternatives at the Zero Bound,” Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, No. 2004-48, 2004. [^Back]

    [26]. [1] Bernanke, B., “Deflation,” Remarks before the National Economists Club, Washington DC, Nov. 21st, 2002. [^Back]

    [27]. [2] Bernanke, B., “Some Reflections on Japanese Monetary Policy,” Presentation at Bank of Japan, May 24th, 2017. [^Back]

    [28]. [3] Greenwood, R., S. Hanson, J. Rudolph and L. Summers, “Government Debt Management at the Zero Lower Bound,” Hutchins Center on Fiscal and Monetary Policy, Working Paper, No. 5, 2014; Iwata, Kazumasaand I. Fudea-Samikawa, “Quantitative and Qualitative Monetary Easing Effects and Associated Risks,” Japan Centre for Economic Research (JCER), Financial Research Paper, No. 25, 2013. [^Back]

    [29]. [1] Bayoumi, T., G. Dell’ Ariccia, K. Habermeier, T. Mancini-Griffoli and F. Valencia, “Monetary Policy in the New Normal,” IMF Staff Discussion Notes, No. 14/3, 2014. [^Back]

    [30]. [2] Issing, O., “Forward Guidance,” SAFE White Paper Series, No. 16, 2014; Taylor, J., “Can WeRestart the Recovery All Over Again?” American Economic Review, 106(5): 48–51, 2016. [^Back]

    [31]. [3] Humpage, O., “The Fed’s Yield-Curve-Control Policy,” Federal Reserve Bank of Cleveland, EconomicCommentary, No. 2016-15, 2016. [^Back]

    [32]. [4] Ross, M., “‘OperationTwist: A Mistaken Policy ?” Journal of Political Economy, 74(2): 195–199, 1966. [^Back]

    [33]. [5] Swanson, T., “Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets,” NBER Working Papers, No. 23311, 2017; Salachas, E., N. Laopodis and G. Kouretas, “The Bank-Lending Channel and Monetary Policy during Pre-and Post-2007 Crisis,” Journal of International Financial Markets, Institutions and Money, 47(C): 176–187, 2017. [^Back]

    [34]. [1] Sims, C., “Fiscal Policy, Monetary Policy and Central Bank Independence,” Luncheon Address at the Jackson Hole Symposium, August, 2016. [^Back]

    [35]. [2] Powell, J., “Thoughts on the Normalization of Monetary Policy,” Speech at the Economic Club of New York, June, 1st, 2017; Brainard, L., “Transitions in the Outlook and Monetary Policy,” Speech at the John F. Kennedy School of Government, Harvard University, Mar. 1st, 2017. [^Back]

    [36]. [3] Sellin, P. and P. Sommar, “The Riksbank’s Operational Framework for the Implementation of Monetary Policy: A Review,” Riksbank Studies, March, 2014; Bindseil, U., “Evaluating Monetary Policy OperationalFrameworks,” Paper for the Jackson Hole Symposium, August, 2016. [^Back]

    [37]. [1] Zhang, X. China Finance (中国金融), (19): 28–30 (2015); Ma, J. & Ji, M. Interest Rate Transmission under the New Monetary Policy Framework (新货币政策框架下的利率传导机制). Beijing: China Finance Publishing House (2016). [^Back]

    [38]. [2] Yellen, J., “The Federal Reserve’s Monetary Policy Toolkit,” Speech at the Jackson Hole Symposium, Aug., 26th, 2016. [^Back]

This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 05, Pages 91-103+6

September 2018

Downloads:0

Share
Article Outline

Abstract

  • 1 Historical experience of the monetary policy with the yield curve as the operating target
  • 2 Reflections on the policy of yield curve control
  • 3 Policy implications to China
  • Footnote