Authors Marlene Amstad and Antoine Martin begin their analysis by considering how four central banks—the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank—approach the choice of an interest rate target, or “operational target,” a standard feature of conventional monetary policy. While the first three central banks target an overnight rate, the Swiss central bank targets a range for the three-month Libor for the Swiss franc. The authors note that the choice between a short-term and longer-term rate presents trade-offs: the former is easier to target, but the latter is more relevant to economic activity, since it more directly influences firms’ investment decisions and households’ real estate decisions. Moreover, during periods of financial stress, the use of the three-month rate permits a central bank to stabilize the long-term rate while letting shorter rates fluctuate to absorb changes in risk or liquidity premia.
In the second half of their analysis, Amstad and Martin consider how the four central banks have chosen to manage the expanded balance sheets they acquired during the financial crisis as a result of unconventional monetary policy actions. Specifically, the discussion centers on the choice of particular instruments that allow the banks to adjust interest rates without regard to the quantity of reserves on their balance sheets. As the authors explain, the four central banks have adopted different combinations of three instruments: the payment of interest on excess reserves at the policy rate, the issuance of central bank bills and the use of reverse repurchase agreements.
Amstad and Martin observe that the central banks’ different approaches to balance sheet management may in part reflect “the unique institutional setting in which each one operates.” They caution that it is too early to tell what the outcome of the individual banks’ choices will be, but suggest that an “awareness of the . . . instruments and strategies that are possible” can inform policymakers’ efforts to guide the economy in good times and in bad.Marlene Amstad is deputy director and head of Investment Strategy and Financial Market Analysis at the Swiss National Bank; Antoine Martin is an assistant vice president in the Money and Payments Studies Function of the Federal Reserve Bank of New York.