Whatever-It-Takes Policymaking during the Pandemic | Economics, Applied

Summary

In this podcast, Steven Davis discusses the unprecedented monetary policy responses by central banks to the COVID-19 pandemic, including open-ended asset purchases. Kathryn Dominguez, a professor with extensive experience, shares insights on the impact and rationale of 'whatever it takes' policies. They explore the effectiveness of these measures in stabilizing financial markets and the challenges of forward guidance in monetary policy, highlighting the importance of central bank communication during crises.

Takeaways

• 😷 The COVID-19 pandemic prompted central banks worldwide to engage in large-scale purchases of various financial assets to stabilize markets and stimulate economic activity.
• 🏦 Central banks characterized some of these asset purchase programs as 'open-ended' to shock and awe market participants, aiming to restore confidence in financial markets.
• 📉 The initial stages of the pandemic saw dramatic movements in stock and bond markets, leading central banks to act swiftly to stabilize these financial markets.
• 💹 Central banks' actions were not just limited to developed economies; emerging markets also adopted similar 'whatever it takes' policies, sometimes requiring legislative changes.
• 🌐 The global nature of the pandemic led to a coordinated response from central banks around the world, which helped in maintaining stability in financial markets.
• 📈 The 'whatever it takes' approach was associated with a significant impact on 10-year government bond yields, exceeding the effects of more traditional monetary policy announcements.
• 🤔 The paper by Kathryn Dominguez and Andrea Foskey suggests that the market reactions to these announcements were influenced by the perceived commitment of central banks to support economies through uncertainty.
• 💬 The concept of 'constructive ambiguity' in central bank communications was highlighted as a potential tool for policy, especially in extraordinary times of crisis.
• 🔄 The pandemic response demonstrated the effectiveness of central banks in calming markets during a crisis, but also raised questions about the duration and consequences of sustained monetary easing.
• 🔍 The research underscores the importance of considering the broader economic context and the potential for policy actions to influence market expectations and behaviors.
• 🚀 The early response by central banks, including the Federal Reserve, is viewed as successful in preventing a complete collapse of financial markets, despite later concerns about the prolonged expansionary policies.

Q & A

What was the primary response of central banks to the COVID-19 pandemic in terms of financial assets?

Central banks around the world responded to the COVID-19 pandemic with large-scale purchases of various financial assets, including government bonds, mortgage-backed securities, commercial paper, corporate bonds, and even stocks.

Why did central banks characterize some of their asset purchase programs as open-ended during the pandemic?

Some central banks characterized their asset purchase programs as open-ended to shock and awe market participants and restore confidence in financial markets during the uncertainty of the pandemic.

What is the standard monetary policy playbook in reaction to a typical recession according to the script?

The standard monetary policy playbook in reaction to a typical recession involves central banks focusing on interest rates and using their capacity to stimulate economic activity, often by lowering interest rates to encourage borrowing and spending.

How did the central banks' approach to monetary policy differ during the pandemic compared to a plain vanilla recession?

During the pandemic, central banks felt that the standard playbook was not sufficient due to the unusual circumstances and uncertainty. They resorted to making extraordinary announcements and open-ended commitments to stabilize financial markets and stimulate economic activity.

Why was the standard monetary policy response not enough during the pandemic?

The standard monetary policy response was not enough during the pandemic because interest rates were already very low, and the financial markets were extremely volatile, necessitating more aggressive and open-ended measures.

What was the initial impetus for central banks to intervene in the financial markets during the early stages of the pandemic?

The initial impetus for central banks to intervene was the dramatic volatility observed in stock markets, corporate bond markets, and sovereign bond markets, indicating potential instability in financial markets.

How did central banks' actions during the pandemic differ from their typical approach to monetary policy?

Central banks' actions during the pandemic were characterized by open-ended commitments and 'whatever it takes' announcements, as opposed to the typical approach of clear, transparent guidance on policy actions, time frames, and eligible assets.

What was the impact of central banks' 'whatever it takes' policies on financial markets according to the research discussed in the script?

The 'whatever it takes' policies had a significant impact on financial markets, particularly on 10-year government bond yields, and led to exchange rate stability, with advanced economies seeing currency appreciations and emerging markets seeing depreciations.

How did the research control for other factors that might have influenced the effects of central bank announcements?

The research controlled for other factors by considering announcements made by the central bank and others prior to the event, economic conditions, COVID-19 case numbers, and global circumstances to isolate the surprise factor of each announcement.

What is the concept of constructive ambiguity as discussed in the context of central bank communications during the pandemic?

Constructive ambiguity refers to the deliberate lack of specificity in central bank communications about the scale and duration of their policy actions, allowing for flexibility and adaptation to evolving circumstances.

What are some potential downsides of using constructive ambiguity in central bank communications?

Potential downsides of constructive ambiguity include the risk of always having to escalate policy actions, the possibility of disappointing financial markets if precise expectations are set, and the potential undermining of central bank credibility if commitments are not met.

What role did the Federal Reserve play in providing liquidity to other central banks during the pandemic?

The Federal Reserve acted as the central bank for central banks by extending swap lines and other liquidity facilities, ensuring that other central banks had access to dollar assets and helping to calm global financial markets.

What is the general consensus on the effectiveness of central banks' early response to the pandemic?

The general consensus is that central banks' early response to the pandemic was successful in preventing a complete collapse of financial markets and calming potential panic, although there is less agreement on the appropriateness of continued expansionary policies.

Outlines

00:00

🏛️ Central Banks' Response to COVID-19

The script discusses the unprecedented actions taken by central banks globally in response to the COVID-19 pandemic, including large-scale purchases of various financial assets. The aim was to stabilize financial markets and restore confidence. The show, 'Economics Applied,' hosted by Steven Davis, features Kathryn Dominguez, a professor with extensive experience in monetary policy, to delve into the impact and rationale behind these 'open-ended' policies.

05:01

📉 Unusual Circumstances of the Pandemic

This paragraph examines why the standard monetary policy playbook was insufficient during the pandemic. The uncertainty surrounding the duration and impact of COVID-19 on households and firms made traditional responses like interest rate adjustments less effective. Central banks had to step in to stabilize the volatile financial markets, which were experiencing a 'dash for cash' as investors sought liquidity.

10:04

🌐 Global Coordination of Central Banks

The discussion highlights the global coordination among central banks, starting with the Bank of Canada's open-ended asset purchase announcement, followed by the Federal Reserve, Bank of Mexico, European Central Bank, and others. The 'whatever it takes' approach was characterized by no limits on scale and no specified duration, a departure from the usual transparent and defined policies.

15:06

📊 Assessing the Impact of 'Whatever It Takes' Policies

The script outlines a research approach to assess the impact of central banks' 'whatever it takes' policies during the pandemic. The study, co-authored by Kathryn Dominguez and Andrea Foskey, focuses on the announcement effects on financial markets rather than the actual asset purchases. The researchers controlled for various factors to isolate the surprise element of the announcements and their subsequent market reactions.

20:09

📉 Initial Impact and Market Stability

The research found that the initial 'whatever it takes' announcements had the most significant impact, particularly on 10-year government bond yields. The first announcements by central banks were the most surprising and thus had the largest effects on financial markets, which were already experiencing turmoil due to the pandemic.

25:10

💰 Diverse Currency Reactions

The script discusses the varied reactions in currency markets to the central banks' announcements. Advanced economies saw their currencies appreciate, while emerging markets experienced depreciation. The flight to safety during the pandemic led to increased demand for the US dollar and other advanced economy currencies, contrary to typical expectations during monetary policy easing.

30:10

🔍 Delving into Financial Stability and Market Intervention

This paragraph explores the rationale behind central banks' interventions for financial stability during the pandemic. The early phase of the pandemic saw a focus on calming financial markets, which were experiencing significant turbulence. The interventions were successful in achieving stability, despite the sharp contraction in economic output.

35:10

📉 The Persistent Impact of Initial Announcements

The research indicates that the effects of 'whatever it takes' announcements were concentrated in early 2020, with most impacts occurring during the initial waves of the pandemic. Subsequent announcements had diminishing effects, suggesting that the initial surprise and market conditions played a significant role in the response.

40:13

🤔 Reflecting on the Role of Central Bank Announcements

The script considers whether market participants reacted to central bank announcements based on perceptions of broader government responses to the pandemic. While the research does not rule out this possibility, it suggests that the announcements themselves had a substantial effect on financial markets, regardless of coordinated government actions.

45:15

🛑 Constructive Ambiguity in Central Bank Communications

The discussion turns to the role of 'constructive ambiguity' in central bank communications, particularly in the context of the pandemic. The approach allowed central banks to adapt to uncertainty without committing to specific actions. However, the script also raises concerns about the long-term implications of such ambiguity for central bank credibility and policy effectiveness.

🌟 Optimism in Policy Response

The script concludes with an optimistic view of central banks' ability to respond effectively to crises like the COVID-19 pandemic. The early interventions were successful in preventing a complete collapse of financial markets, demonstrating the importance of central bank leadership and coordination during times of potential panic.

🤝 The Fed's Role as the Central Bank for Central Banks

The conversation ends with an acknowledgment of the Fed's behind-the-scenes role in providing liquidity facilities to other central banks, which helped to calm global markets during the pandemic. The expansion of these facilities is seen as a significant factor in preventing financial panic and ensuring stability.

Keywords

💡Central Banks

Central banks are national institutions that manage monetary policy, regulate financial systems, and often act as lenders of last resort. In the video, central banks' responses to the COVID-19 pandemic are the focal point, as they engaged in large-scale asset purchases to stabilize financial markets. The script mentions how central banks characterized these asset purchase programs as 'open-ended,' aiming to shock and awe market participants and restore confidence.

💡Financial Assets

Financial assets refer to any form of property that has monetary value in a financial market. In the context of the video, central banks purchased various financial assets, including government bonds, mortgage-backed securities, commercial paper, corporate bonds, and stocks, to mitigate the economic impact of the pandemic.

💡Open-Endedness

In the video, 'open-endedness' is associated with central bank policies that do not have a predetermined limit or time frame. This approach was taken to convey a sense of commitment to do 'whatever it takes' to stabilize financial markets during the pandemic, as opposed to having a fixed limit on the scale of asset purchases.

💡Monetary Policy

Monetary policy is the process by which a central bank manages the money supply and interest rates to control inflation and stabilize the economy. The script discusses the standard monetary policy playbook in response to recessions and contrasts it with the unconventional measures taken during the pandemic.

💡Interest Rates

Interest rates are the cost of borrowing money and are a key tool used by central banks in monetary policy. The script explains how central banks typically lower interest rates during economic downturns to encourage borrowing and stimulate economic activity. However, during the pandemic, interest rates were already low, prompting central banks to use other measures.

💡Aggregate Demand

Aggregate demand represents the total demand for all goods and services in an economy over a specific period. The video discusses how central banks aim to stimulate aggregate demand during downturns, for instance, by making it easier for banks to lend to firms and households.

💡Pandemic Response

The pandemic response in the video refers to the measures taken by central banks to address the economic and financial disruptions caused by COVID-19. These responses included unprecedented asset purchase programs and the use of 'whatever it takes' rhetoric to instill confidence in financial markets.

💡Financial Market Stability

Financial market stability refers to the condition where markets are orderly and efficiently allocate capital without excessive volatility. The script highlights the importance of central banks ensuring financial market stability during the pandemic, as it was a key factor in their decision-making process.

💡Government Bonds

Government bonds are debt securities issued by governments to raise capital. In the video, government bonds are mentioned as one of the types of financial assets that central banks purchased in large quantities to inject liquidity into the markets and stabilize them during the pandemic.

💡Constructive Ambiguity

Constructive ambiguity is a deliberate lack of specificity in policy communication to allow for flexibility in response. The video discusses how central banks used this approach during the pandemic, announcing open-ended policies without setting clear limits or timelines, which created a sense of unlimited support for the markets.

💡Forward Guidance

Forward guidance is a central bank's communication about its future actions to influence market expectations. The script debates the effectiveness of forward guidance, especially in the context of the pandemic, where traditional forms of guidance were replaced with more ambiguous commitments.

Highlights

Central banks globally responded to the COVID-19 pandemic with extensive purchases of various financial assets, including government bonds and stocks, in an effort to stabilize financial markets.

The asset purchase programs were characterized as open-ended to shock and awe market participants, aiming to restore confidence in financial markets.

Kathryn Dominguez, a professor of public policy and economics at the University of Michigan, discusses the impact and wisdom of open-ended central bank policies.

Traditional monetary policy involves lowering interest rates to stimulate economic activity during downturns, but the pandemic required unconventional measures due to already low interest rates.

Central banks used open market operations to increase bank lending capacity, but the pandemic's uniqueness called for more drastic steps.

The initial stages of the pandemic in early 2020 saw dramatic financial market volatility, prompting central banks to act quickly to stabilize these markets.

The 'whatever it takes' approach by central banks was a break from traditional policy, with no limits on scale or time frame for asset purchases.

The Bank of Canada was the first to announce an open-ended asset purchase program, marking the beginning of a global trend among central banks.

Dominguez and her co-author Andrea Foskey conducted a study analyzing the effects of central bank announcements on financial markets during the pandemic.

Their research found that 'whatever it takes' announcements had a significant impact on 10-year government bond yields, exceeding traditional announcement effects.

The study also observed that the effects of these announcements were concentrated in the initial phase of the pandemic, particularly in March and April 2020.

Financial market reactions varied, with advanced economies seeing currency appreciations and emerging markets experiencing depreciations.

The research suggests that central bank announcements were perceived as indicative of broader government policy responses, not just monetary policy.

The concept of constructive ambiguity in central bank communications is discussed, highlighting its potential benefits during periods of extreme uncertainty.

Dominguez expresses optimism about the effectiveness of central bank actions in calming financial markets during the pandemic, despite the unconventional approach.

The role of the Federal Reserve as the central bank for central banks is acknowledged, with its liquidity facilities helping to prevent global financial panic.

The conversation concludes with a nuanced view of central bank responses, praising the early actions but questioning the continuation of expansionary policies post-pandemic.

Transcripts

Central banks around the world responded to the COVID 19 pandemic with large

scale purchases of financial assets.

Government bonds, mortgage backed securities, commercial paper,

corporate bonds, and even stocks.

In some cases, central banks characterized these asset purchase programs as

open ended in an effort to And here I'm quoting our guest to shock and

awe market participants and restore confidence in financial markets.

Today's show considers the impact and the wisdom of open

endedness or whatever it takes.

In central bank policy pronouncements and actions

Welcome to economics applied a podcast sponsored by the hoover institution.

My name is Steven Davis Senior fellow at the Hoover

institution and host of the show.

Our guest today is Kathryn Dominguez She is a professor of public policy and

economics at the University of Michigan.

She's also taught at Harvard, Princeton, Berkeley, and the

London School of Economics.

She has served in consulting and advisory capacities to the Federal Reserve's bank

system, the World Bank, the International Monetary Fund, the Bank for International

Settlements, and I could go on.

In short, she's much in demand.

So thank you so much for joining us, Catherine.

Oh, I'm delighted to be here, Steve.

So, we will get to the pandemic and how central banks responded, but I want

to lay some groundwork first for our audience, not everybody who's deeply

into monetary policy, because it is an esoteric topic for most people.

So, perhaps you could start by just sketching for us what the standard

monetary policy playbook is in reaction to, you know, Uh, plain vanilla

recession and you know what the logic behind that playbook is just so we

can have something to contrast it to.

Sure.

Um, we haven't had that many plain vanilla recessions lately.

Uh, so you have to go back a ways, but normally, uh, the, um, monetary authority

in most countries have, uh, mandates that say that they're the main thing that they

need to concern themselves is inflation.

Um, it's not just about inflation or price stability, but also sometimes

there are additional kinds of objectives, including financial market

stability and, uh, economic activity.

Kind of, uh, maximizing economic activity.

Um, so when, uh, uh, an economy is slowing down, uh, depending very much

on the context, uh, often central banks.

Along with the fiscal authority tried to stimulate aggregate demand or try

to smooth out, uh, the downturn in the economy, and they do so with a

number of different instruments, uh, including, uh, basically providing

more, uh, capacity for banks to lend to, to firms and households to try to

again, uh, stimulate economic activity.

Um, so normally the, the key variable that they're focused on is the interest rate.

And one of the things that we, they would like to do in downturns

is to lower the interest so that it's easier for people to borrow.

And presumably smooth out the economic circumstances.

And I guess it's, it's fair to say that, aside from the last two recessions,

which were big ones, um, central banks, at least in the advanced economies,

typically did that by, uh, buying and selling short term government securities.

That's right.

Uh, uh, you know, different, different central banks have done different things.

Uh, you need a bond market to be able to do what we, what we typically

refer to as open market operations.

So not all countries, including many emerging, uh, economies

don't have, uh, big bond markets.

But if, if a country does have a bond market, that was sort of the, the standard

way in which the central bank would kind of increase or decrease the interest rate.

Okay.

Okay, and so now take us to the pandemic, and you've already alluded to

implicitly the global financial crisis, where central banks felt like their

standard playbook was not sufficient.

To deal with the with the circumstances at hand.

So can you can you say a little bit about why?

Why couldn't you just follow the standard playbook?

And I understand that you emphasized the standard playbook differed somewhat

across countries, depending on their financial market depth and so on.

But why?

Why wasn't the standard response enough?

So the pandemic was an unusual for for all policymakers.

They everyone was trying to figure out how long is this going to last?

And how exactly our households and firms going to respond?

Um, I would say the initial stages.

Um, so we're talking early 2020.

It was really the financial markets that drew in the central banks.

We started to see some really dramatic movements in stock markets.

In corporate bond markets, uh, and in sovereign bond market.

So I'd say the initial impetus for central banks to jump in were, uh, the financial

markets and the kind of volatility that we saw, um, there, I don't know

how far ahead you want me to get, uh, here on this, but, um, It's now often

described as the global dash for cash.

There was this sense that as businesses closed down, that everyone was

concerned that financial markets might actually, um, really become unstable.

And so there was a sense of, you want to have something very liquid, um, and so

liquid as to actually go down to cash.

To make sure I understand the time right here.

We're talking about February 2020 and early March 2020.

Is that right?

Exactly.

Exactly.

Um, and and even in early February.

Um, so so there wasn't really any discussion yet of of closing

down businesses, but, uh, yields curves in the United States and

other countries started to invert.

That's often kind of a signal to markets, uh, that things are, are, uh, Uh, looking,

um, problematic, uh, going forward.

So I think there was from, from the early months of 2020, well before the

actual, uh, closing down of businesses, a sense that things were, uh, not well.

And so central banks, uh, And so they felt that one of the things that they needed

to do was stabilize financial markets,

right?

And so, among other things, also stock markets collapsed during this period by

40, 50 percent in some countries and by 30 percent or more in many countries.

Pretty much almost all around the world, not every country, but

almost all the major economies.

These were very dramatic movements.

They

were very dramatic movements, and so if you put yourself in the shoes

of policymakers, they see this.

Um, they're aware that often, It's not, it's not perfectly accurate, but big stock

market collapses often precede downturns in real economic activity, right?

That's right.

And again, there hadn't yet been a downturn in economic activity, but

these were kind of indicators that there was a lot of uncertainty.

So that, that put the central banks on notice.

The bad economic times were likely coming, but again, why wasn't so?

Why not just the an aggressive response with standard monetary policy

instruments or maybe Maybe since the global financial crisis, the

notion of standard is, is expanded.

It's a much more, it's a much bigger toolbox, but, but central

banks apparently, and this is one of the points of your paper, took

it upon themselves in many cases to make extraordinary announcements.

And you can maybe get into that too, this, whatever it takes, the open ended

character of some of these announcements, they felt compelled in some cases to

do more than the standard playbook.

That's right.

It's also.

Good to remember the context interest rates were already very low

at the beginning of the pandemic.

Um, so normally, uh, again in a.

time period where you think economic activity is slowing down.

One of the things you'd like to do is lower interest rates, but

interest rates were already very low.

And just as had been done during the great recession, there was a sense that, um,

the normal kinds of, uh, uh, open market operations type, uh, of monetary policy

just really wouldn't do what you needed to do when interest rates were very low.

Financial markets were so volatile.

Um, but it is interesting.

Um, uh, starting in March, I think it was March 12th.

Uh, actually, there's the Bank of Canada.

That was the first, uh, uh, central bank that came out very strongly with,

uh, a set of, uh, announcements about the kinds of the assets that they would

purchase, um, and, uh, a sense that there was no, uh, Limit in size, uh, and no

particular time frame over which they would be doing these, uh, uh, purchases.

So, uh, again, kind of, uh, in our paper, what we describe as the first, whatever

it takes moment during this particular episode where central banks decided to go.

In very big and, and, uh, the Bank of Canada was quickly followed

by the Federal Reserve Bank.

Actually, the Bank of Mexico was one of the early, uh, announcers

and the European Central Bank.

And then, uh, many, many other central banks, pretty much every central bank,

uh, in succession over the next few weeks.

Okay.

So this was open ended, whatever it takes in two respects, no limits on scale.

And at least in the Bank of Canada example, you mentioned.

no specified duration, no, no, no, no specified end date.

That's right.

And, and that is quite different than what we have seen in the past, where

typically central banks are very transparent or have been actually in the

last, say, 20 years of exactly what's the facility, how much will they be

spending over what time period, what kinds of eligible assets, very, very clear.

guidance to the market about exactly what they're doing.

Uh, this was kind of we're, we're starting off with sovereign bonds.

We might be, uh, actually including other kinds of assets as we go forward.

So again, um, uh, somewhat ambiguous, uh, but the ambiguous in the Um, maybe

even bigger than we are currently saying, uh, rather than, uh, the much

more kind of, uh, typically very clear, transparent, uh, kinds of statements

that, that we're used to now and we were used to before this time period.

So I want to, I want to come back to this, um, deliberate

ambiguity aspect of these policies.

It's really important, but let's, let's do that after you've kind

of described what you found.

And how you went about figuring out or assessing the effects of these,

whatever it takes type policies.

So just lay that out for us, give us a sense, because it's a, it's

a challenging, uh, inference.

question to figure out what these things, how they, how they actually mattered, if

they mattered, because many, many other things are happening at the same time.

So give us your, give us an explanation of how you went about this exercise.

Okay, sure.

And let me, let me just backtrack for a second and say, this is coauthored

work with Andrea Foskey, who is a graduate student at the University

of Michigan, uh, about to get his PhD and go off to the Bank of Italy.

Wonderful.

Uh,

Yeah.

Uh, and, um, we, uh, start with a, um, uh, spreadsheet.

We started with a spreadsheet of all the announcements that central

banks made over this time period, which includes 23 central banks.

And I should say we started off with the idea that we didn't

want to look at one central bank.

We didn't want to just look at the Federal Reserve.

There had been prior to our study, and there have been since, many kind of

individual central bank studies, but our view was, let's look overall at the

whole panel of central banks that made announcements during this time period.

And I also want to emphasize the word announcement.

So we're looking at announcement effects, not the actual results.

Actual purchases of these assets that they are announcing that

they're about to purchase.

So we are looking at the, uh, financial market reaction.

And in the case of this paper, we're looking at both exchange rate and, uh,

Mostly 10 year yields on on sovereign bonds, and we're looking to see how

those asset prices move at the time of the announcement and as you suggest,

there's there's a difficulty because the central bank is most likely to make

this announcement when things are not going very well within the country.

And so what we try to do is.

So, uh, what we do is take into account or control for as many things as we

can, as we look at the effect of a particular announcement, which typically,

uh, uh, in, in these cases, were not announcements that happened at the

usual time, but were kind of outside the sequence of, of announcements that

central banks would typically make.

Uh, and we take into account.

What announcements were made both by that central bank and other central banks prior

to the announcement, we take into account what's going on within the economy,

what's going on in terms of covid cases.

Uh, what's, uh, going on, uh, in terms of global, uh, uh, COVID cases.

So we try to control for as many things as we can that are likely

to be driving central bank policy.

Because what we want to try to get at is the surprise factor.

What didn't the financial markets know at the time of this announcement?

And then how did they react to this announcement?

And again, we're looking across a panel of central banks.

So it's not one central bank, uh, and we're looking across, uh, exchange

rates across these various different central banks and their, their

own, uh, bond yield, uh, reactions.

So, um, again, the, the, um, our, our largest, um, Impact effects tend

to be the very first announcement that a central bank makes, and this

is very much in keeping, I think, with the context of your question.

One, the first time nobody knew it was coming, and that's likely

to be the biggest surprise.

Once you've already come out with the, we're going to do whatever it takes,

Another whatever it takes announcement or or another just, uh, sort of more

traditional announcement about policy is less likely to have a big effect.

And that's exactly what we find.

Okay, so you're a few things there.

You are resting in part on the forward looking nature of financial markets.

Um, so the announcements themselves may the responses to the announcements

will, at least to some extent, roll in the expectations that that

announcement creates about what the central bank will do in the future.

And just for the, those who aren't aficionado is another.

advantage of looking at the financial market responses is financial market data

is available at very high frequency and I presume that helps you disentangle the

effects of the announcements from other things that are happening in a similar

but not exactly the same time frame.

That's right.

One of the things we grappled with a lot in the paper, we do a lot of

different, uh, kind of cuts at this.

What should the control be?

So we're looking at, um, how does a particular kind of very open

ended announcement, um, uh, what are the impacts of that relative

to either no announcement, , or what we’ll call traditional or size limited announcements.

So we're looking at how did these things differ both from situations where no

announcements were made and situations in which sort of more traditional

announcements were made in both cases to try to understand how much.

In addition to what we normally expect to see when a central bank comes and

says that they're going to, uh, try to, uh, uh, increase aggregate demand

through their monetary policy, um, uh, uh, actions, how much bigger were these

effects relative to kind of the more traditional kinds of announcements?

Okay, so you don't want to get into conceptual matter.

So let me set it up.

You've already made clear that your outcome measure of interest is the

yield on long term government bonds in each of these different countries,

I presume, and that's a way to assess the impact on interest rates, okay?

But when I think about the case for financial market intervention, It seems

to me that the most compelling case is you want to intervene to make sure

that financial markets continue to operate in an orderly liquid manner.

That's a little harder to measure directly than yields on government bonds.

It's not so obvious.

Maybe, maybe you think it is obvious, but it's not so obvious to

me that just as a matter of basic economics, that you want to encourage

more consumption and investment.

In this period, when partly due to government restrictions on economic

activity, but also because of people's fears of contagion, there's

a very sharp contraction in output.

Okay, so somehow there's, there's less output to go around and it

doesn't seem like the ideal time to be encouraging more consumption, more

investment, which other things equal lower interest rates tend to do.

So did you settle on the government bond yield because that's the only

uniform way to measure the effects?

Is it just too hard to go about?

I would think the main goal of these interventions would be, as I said before,

let's make sure that financial markets continue to operate in an orderly,

liquid manner, which could even happen with some rise in interest rates.

A basic economic model with no frictions would say the interest rate ought to

go up during this period, not down.

So what's, help us, help us understand how you think about that.

Sure.

I mean, one thing to note is, uh, after that initial, uh, financial market

turbulence that we saw in March, 2020, things did calm down fairly, uh, rapidly.

So there, uh, you know, one of the So one of the reasons I think a lot of these

announcements were made was, was twofold.

First to actually calm financial markets, which I think they very successfully did.

And then second as this aggregate demand stimulus.

Uh It it uh Certainly was the case for many of these central banks.

I should also backtrack as central banks came in with these announcements.

I think it actually did put a lot of peer pressure on other central banks to

basically follow suit because if, uh, A number of central banks are saying,

we're going to do whatever it takes.

You look like you're the one central bank who's like letting that their economy,

uh, uh, go, go, uh, as, as it will.

So there was, I think, a sense of if, if the fed is in there and the

European central bank is in there, I should probably be in there as well.

Uh, in terms of what kind of, um, outcome variables to look at, again,

the exchange rate was one thing that we, that we wanted to look at, um, and

we, we do look at in this, um, study.

It, it, uh, it, it.

Gives a little bit less clear, um, uh, a sense of how these announcements were,

um, uh, uh, interpreted by financial markets in part because exchange rates

are likely to, or we would normally expect a currency to depreciate.

When a central bank is is taking on expansionary monetary policy.

So if they're saying we're going to do whatever it takes, we're going

to be purchasing these assets.

We typically expect the currency to fall in value, but actually, what we

find, especially for the US, but for a number of the other advanced economies

is the opposite, uh, that in fact, The dollar appreciated relative to many

other currencies, as did the euro and a number of the other advanced economy

currencies where we saw the currencies depreciate was in the emerging economies.

And this is kind of, if you step back for a moment, this is not so surprising.

This.

Uh, I think this kind of comes back to your initial, uh, uh, question

about financial market stability.

Uh, basically there was a flight to safety during this time period and the

dollar was thought to be a safe asset.

In fact, I think the Federal Reserve, uh, Announcements of new facilities

and these kinds of whatever it takes policies reassured the market that the U.

S.

was doing whatever it needed to do in order to keep financial markets

stable, and that in turn led to, uh, demand for more dollars and

therefore a more appreciated dollar.

Um, in fact, I, I, if, if you had asked me what would I expect to see in

exchange rates, When something like a pandemic hits, I would have expected a

lot more movement than we actually saw.

Uh, and I think part of that is, in fact, because of these central bank

policies, um, and importantly, the fact that everyone was doing it.

And the same time.

Normally we see big movements in exchange rates because one

country is doing one thing and another country is doing another.

The fact that all countries are basically doing the same thing at the same time

meant that we saw a lot more stability and exchange rates than we normally would

have expected with such a large shock.

Uh so I don't I I'm not sure that I've completely answered your question,

but I do think that initially most of these announcements were in fact

Focused on the idea of financial market stability, many countries then had to

follow suit because they too wanted their financial markets to be stable.

Um, and then there, there was this sort of, um, ongoing, um, objective of,

of potentially stimulated aggregates.

So there's a lot there to parse.

I want to summarize some of it and then probe on one part a little bit further.

Okay.

So.

Exchange, there are benefits of exchange rate stability.

That's not the main topic of today.

So let's just stipulate that there are benefits to having

exchange rate stability.

Uh, so, you know, so that was, uh, a benefit of this.

I also understand the argument that if I undertake what looks like a monetary

policy easing action and my currency appreciates, that is indirect evidence,

at least, that that monetary policy action is having favorable consequences.

consequences on perceived financial stability.

I think that's also part of what you're saying.

Um, I get that argument.

I want to see, I want to ask you directly, do you share my view that the

case for financial stability as a reason to intervene during the pandemic, and

this would apply mainly in the early phases, Was much more compelling than

the case after we'd achieved financial stabilization to continue putting

downward pressure on interest rates as a way to stimulate aggregate demand.

Do you share that view?

And if you don't, why don't you share it?

I do share your view, although I do also remember there was a lot of

uncertainty about how long, uh, the, the COVID pandemic would last and how

exactly that was going to, um, affect different, different, uh,

firms and different kinds of households.

So I, I think there was, um, initially a sense that this might be a fairly

short term, uh, pandemic, uh, and then, uh, kind of, uh, uh, sense that this

might take longer than we anticipated.

So, um, there, there, uh, There could be there could have been multiple

reasons for policy as we got more information basically about how

long this thing was going to last.

And, and frankly, also for a lot of countries what the

fiscal authority was able to do.

Um, you know, not not not all countries put in place.

The same fiscal policies.

Uh, and, um, that was likely to also have an impact on on how the

central banks might might have, uh,

yeah, I see that argument and you're you're stressing the uncertainty and

I think implicit in what you're saying is also the fact that It takes a while

for the real side of the economy to respond to monetary policy actions.

So if we could just instantly if the monetary authority could instantly

offset shortfalls in aggregate demand, whether you can just wait the Wait for

the until the uncertainty resolves, but that's not the world we live in.

And so I think that's part of the argument as well.

Am I correct?

I think so.

I mean, 1 of the thing I'll bring up, which obviously has changed

dramatically recently, but at the.

Time of the pandemic.

Inflation rates were very low across the world.

So the kind of the current focus on inflation simply wasn't there.

And, uh, there had been expansionary policy to some degree, pretty much.

Throughout the period since the great recession, with no uptick in inflation.

So I think the concerns that sort of now we have in retrospect, weren't

there at the time that, that this could eventually lead to, uh, what, what we

now know as, as, you know, inflation.

Right.

Well, to be fair, some, some, Some central bank critics were worried

about the inflationary consequences of this very loose monetary policy, very

tight, very loose fiscal policy in a period in which output had contracted.

So, um, but it wasn't the prevailing concern.

It wasn't the predominant concern among central banks at the time.

And that's a story for another day, but there's a case to be made.

There were two.

They weren't they weren't sufficiently worried about the inflationary

consequences of of their actions.

Um, okay.

So just summarize for us now.

What what is it?

You found if you kind of hinted at it already, but give us the bottom line

results of your empirical investigations.

So we find very strong evidence that when countries.

actually made these whatever it takes announcements.

They had larger impacts, especially on 10 year yields, than did kind

of size limited, similar but size limited, announcements.

Uh, they, uh, had different kinds of, uh, reactions in the foreign exchange

market with advanced economies seeing, uh, Appreciations of their currencies and

emerging markets seeing depreciations of their currencies, but largely what we find

is that these were, uh, relatively large.

And when I say relatively relative to other episodes where, uh,

announcements were made about, uh, monetary policy, uh, going back

to the great recession, these were relatively large, about 50 basis points.

Over and above the standard announcement effect.

Um, and, uh, we find that for, uh, the the period of time, basically

almost all the effects are in 2020.

Okay, so yeah, you said this earlier that the effects were concentrated

at the initial announcement.

Yes.

Um, in, in early 2020, was there anything?

Was there any discernible effect at all?

Of whatever it takes type announcements after the initial waves in March 2020 or.

Uh, for most countries, it was their first whatever it takes announcement.

Now, some, some countries actually made their first whatever it takes

announcements later, Australia was a little bit later to the game than

other countries and their, their first, whatever it takes announcement

was also had a large effect.

So, uh, we're, we're taking each of the.

Um, first announcements and putting them all together and asking

what was the effect on these, uh, financial outcome variables.

Um, and we find, you know, strong effects again with most of them,

uh, happening in March or April.

Okay.

And okay, got it.

And agree.

50 basis points, half a percentage point.

That's a, that's a material, a material difference between whatever it takes.

and more, more time limited or, or size limited policies.

How do you rule out the following, or can you, um, that market participants

are reacting to these, whatever it takes, announcements from the

central bank because they perceive it correctly or incorrectly to be an

indication that the larger government response to the economic and financial

consequences of the pandemic.

Will also be in the, in the, in the, whatever it takes realm, or at least

larger than they had previously expected.

So not the extent to which the central bank is.

closely tied into or reflective of the other aspects of government

policymaking differs across countries.

But how do I know it's not just, oh, if the central bank's really going to do

whatever it takes, I can expect the fiscal authority to do whatever it takes as well.

How do you rule that out?

We don't literally rule that out.

So, uh, you know, uh, the one thing we do look at is whether or not there were other

announcements by, uh, the government's on the day of the central bank announcement.

And the answer is largely no.

So these were not coordinated announcements.

Um, we, we tried to take into account as much as we can of

what happened on that day.

So it's.

It certainly isn't obvious that there's something else going on

on that same day that's actually driving the announcement effect.

Um, and again, part of the reason we have this large panel of central banks

is it's hard to believe that all of those central banks, uh, are, are speaking for

their government as well as themselves.

Maybe one central bank would have that, but it, it's hard to believe that

that would be really what was driving

it.

I agree with that assessment, although I also wonder, so I have the following.

You can tell me if this is an incorrect perception.

I think, especially in many emerging market economies, whether or not the

central bank is formally independent, From the fiscal or financial authority.

It is the case that much of the, uh, economic expertise, macroeconomic

expertise, monetary policy expertise inside the country is in the central bank.

And so the central bank plays a role as consultant to the rest

of the government beyond just what is in their formal mandate.

And so you, maybe not for the United States.

But for some of the countries in your sample, it seems plausible to me, and

I want to get your reaction to this, that market participants are viewing the

central bank as a barometer of broader thinking among policymakers in the

country, and that could be part of the reason why you get these big responses.

It definitely could be.

I will say this.

Uh, most of the emerging markets had not used asset purchase programs in the past.

So this was really a break with previous policy.

A number of countries actually had to have a Legislative changes that allowed the

central banks to actually buy sovereign bonds, which they were not allowed to do.

Brazil was one of those.

So, so it was, um, it was a very different kind of policy than than these countries

had typically followed in the past that it very much was the case that they.

We're doing it often.

I think there were some peer pressure effects where, where, um, uh, the,

the Bank of Mexico is one of the first emerging markets out there doing this.

Uh, but a number of central banks, uh, in other emerging markets followed

suit, um, whether or not this was kind of, um, Aggregating in some

sense, a sense that the country was going to do a lot of stuff, uh,

along with this, um, asset purchases.

I think it's very possible.

I'm not sure that it is a problem, uh, in terms of our results in that, um,

I think you can interpret our results as, um, if in fact, during this time

period, Central banks wanted to calm financial markets and potentially have

an effect on, on their yield curves.

This seems like it was very, um, uh, effective, um, whether or not it was

only because of the policy they were announcing or kind of a broader sense

for what this, what the country was going to do, um, is harder to disentangle.

Yeah, that's a good point.

You're saying basically, look, even if you can't be entirely confident about

the mechanism or the channel through which the central bank announcement

had its effect, For your bottom line result, it still had this effect on,

on, on, uh, government bond yields.

So yeah, I take that point.

Um, so let, let's go back to something that you hinted at earlier, which

I think is, is, it's, it's very interesting, very deep, uh, waters.

And that's, you know, we're, let's turn to the role of what this means now

for Fed communications more broadly.

So there's been, especially since the financial crisis, tremendous interest in

forward guidance From central banks and forward guidance has taken many forms.

I think some forms of forward guidance haven't worked out so well and kind

of put, you know, taken off the out of the toolbox and put on the

shelf, probably not to be used again.

Um, this is a kind of forward guidance, but as you stress in your paper and as

you indicated earlier in your remarks, it's not like here's here's our road map.

We're going to go down this, this, this and this.

very much.

I think you call it constructive ambiguity in your paper.

So can you talk about the pros and cons of this form of constructive ambiguity?

First, in the context of the pandemic, but then, you know, maybe

more broadly, when do central banks want to use constructive ambiguity?

I think the the covid pandemic was was possibly a one off.

Um, I have to say it was such an unusual event where really, we didn't know.

We didn't really know the start the middle or the end.

So, in some sense, saying we don't quite know what the We're going to have

to do, but we're going to do whatever we need to do, uh, under these very

unusual circumstances that that's where kind of fuzzy logic probably

works the best in kind of, uh, I think we started off with, you know, your

standard vanilla, um, situation there.

Uh, I could imagine it being very easy to say.

We know what's happening.

This is what we're doing.

And this is why we're doing it.

And this is when we'll stop doing it.

Um, makes a lot more sense.

I mean, one of the kind of worries about this, whatever it takes approach to

policymaking, is that it forces central banks into a situation where they'll

always have to be kind of escalating even further in sort of, you know, we're

going to do even more than whatever it takes to, to, um, Once, once that

kind of, uh, benchmark is down, it might then lead to this feeling like

you have to be forever saying that we'll do even more than we did before.

So I could imagine, uh, kind of in the post pandemic, uh, time period,

central banks wanting to kind of reset the benchmark and be much more

clear about, This is the circumstance.

This is why we're doing what we're doing.

This is when we'll stop doing what we're doing.

To sort of kind of reset, um, away from the kind of really extraordinary policy

that was, um, in place and possibly Im important to, to have been put in place

at a time when we had so much uncertainty.

Right.

So I want to make a distinction here.

So I'm, I'm on the same page as you that a general, whatever it takes

approach to any plain vanilla recession, stock market downturn or not that,

that's clearly not a good way to go.

But there's a broader question of whether constructive ambiguity is, should be, uh,

should, should that be an approach that monetary authorities rely on more often.

So it's, it's not so clear to me that.

Precise numerical forward guidance has been a success.

Um, so you could imagine, um, moving away from that.

That's, that's in the step of, I don't know whether you

want to call it constructive ambiguity or Purposeful ambiguity.

We're coming back to the rules versus discretion, uh, conversation that monetary

economists have been having for years.

But it is, uh, it's a, it ties your hands, obviously, to be, um, uh, super

clear about what you're going to do.

I think, um, in some cases, it's more stabilizing for financial

markets to have a sense for exactly what's going to happen.

Uh, it does seem that Chair Powell, uh, is, has tried very hard to be

quite clear to financial markets about, um, under what circumstances,

uh, things will change and under what circumstances things will stay the same.

So I think there has been more of a movement toward being super

clear about what you're doing now.

I think where your question is going is how about in the future, and I would

certainly agree with you that kind of tying your hands without really having

full information just seems to well is likely to disappoint financial markets,

frankly, and and also it's not at all clear that it's going to happen.

It's going to, um, you know, part of the reason to let, uh, markets know in advance

about what you're doing is you're trying to get them to move in a way that then

makes your own policy, uh, potentially, uh, less Um, it's going to be a lot

less large than it might otherwise be.

So again, if you can calm financial markets just by saying you're going

to do something and then not actually having to do it, uh, that that,

um, saves you a lot of fire power.

But, uh, again, um, saying exactly what you're going to do under, uh,

future circumstances is probably going to tie your hands in a way

that, uh, will not actually achieve

Yes, and I think that's, you know, that is one of the big concerns in this area.

And some people perceive that the Fed was slow to respond to inflation

in 2021 because they were trying to follow through on commitments

they'd made or promises they'd made.

Previously under the guise of forward guidance.

So that that's one concern that you also alluded to another another concern,

which is I don't think you put it in these terms, but if you if you establish

precise numerical targets as part of forward guidance looking forward in

the future, and then you fail them.

material, you fail to meet them in a material sense, that

undermines the Fed's credibility.

So I think my sense is the Fed has also lost credibility, uh, in the

last three years, not entirely because they failed to meet their, uh, forward

guidance criteria, but, but more, more importantly, just because inflation

got out of control for a while.

So this is deep waters, and I'm just, the reason I'm emphasizing this is because

there's a distinction between To be drawn between constructive ambiguity in the form

of whatever it takes in an episode like the pandemic, and I think you've made a

reasonably strong case for that in this episode, but you also said it's a one off.

And, you know, it's not something that we want to make part of the standard, uh,

monetary policy playbook, but it, but then there's this tougher issue, which I think

the monetary policy makers and central bankers are wrestling with very much these

days is, well, how much precision should we have about the guidance we give to

mark markets about what we're going to do?

Presumably guidance about what the objectives are.

Guidance about and clear transparency about what we're doing now.

I think those are pretty, pretty much still a lot of consensus around those,

but I don't see a lot of consensus around how much precision we should

provide the markets and in what form.

Uh, about what we're going to do in the future.

I agree with you.

I mean, there are some emerging markets who have probably tied their hands

even more than than say, the Fed.

Um, and they probably needed to given given their history.

Um, but, uh, you know, for most advanced economies, it's not clear that you

buy yourself very much, uh, by by, uh, you know, Tying your hands, and

it does seem like the reputational effects are potentially problematic.

Okay, so any, any other broader lessons you think that we should draw

from your research, from what we've learned about this whole episode

for monetary policy going forward?

It's there.

Well, I actually take the results is is kind of an opt in.

I'm an optimist, uh, about policy, and it does.

I went in not not quite sure what we would find.

Um, uh, just because, you know, I hadn't done the research yet and I.

I thought that there would be, um, some effects.

I didn't know that they would be as large as they were.

I wasn't sure that all central banks would have had, uh, kind of a similar effect.

Um, so I, the optimistic kind of, uh, interpretation here is when central

banks really need to do, uh, Uh, I think they were very successful

in calming financial markets at a time where you could have imagined

things really going south quickly.

I think there were, um, you know, to bring yourself back to March 2020.

I think we were all just sort of aghast at what was going on in many

financial markets, and we had gone through the financial crisis in 2008.

I think a lot of people had this kind of Kind of feeling

of, Oh, no, here we go again.

And truthfully, uh, the central bank policies were very successful.

Uh, you know, stock markets, bond markets really calm down quite quickly.

Uh, and it does seem like leadership.

I I'll put it, uh, before I called it peer pressure, uh,

leadership, uh, among the earlier.

Central bank actions where they were successful, I think, then let

other central banks to realize, Okay, we can do this, too.

Um, so I take it as a very positive example of central banks being

able to come in at a moment of potential panic, calm things down.

And obviously, there, there have been all kinds of, um, Difficult,

um, consequences of of the pandemic, but one of them wasn't a complete

collapse of the financial markets, which I don't know that we could have.

Said in advance would would have happened.

Um, so I, I take it as very positive signal that in at least this particular

circumstance, uh, the approach taken seemed to have been very successful.

So.

You make a very important point.

It is useful to put yourself back in the mindset of, especially March

2020 and in the, at least in the U.

S.

and the advanced economies, maybe a little bit later in some other places, you

know, there were, there were, there were serious legitimate concerns that things

could have been much worse and, uh, the fact that they didn't get Appreciate it.

Much worse, I think is a testament in part to the central bank interventions.

I think that part of the central bank response.

I I'm on exactly the same page as you belong.

Continuation of easy monetary policy.

I think that that.

The case is much less compelling that that was an appropriate that that was a

desirable monetary response, given the way things have played out, or even,

you know, whether it seemed desirable in real time, but the early response,

yeah, it could have been much worse.

There were legitimate concerns.

You can just go back and read the newspapers from that that time period.

So I think, in that sense, this was a success.

You know, something else I you you reminded me of something.

And I.

It's not the topic of your paper, but I just want to put it on the table and

see whether you want to comment on it.

And that is a behind the scenes role that the Fed played that was quite important

in this period, but also in the global financial crisis are the liquidity

facilities that the Fed extended to other leading central banks around the world.

Uh, and you know, I think of the Fed as the central bank for central banks.

And I think those facilities and their expansion also Help these

other central banks to respond in a way that that, uh, squelched some of

the fears of, uh, financial panic.

Is that is that a correct assessment?

Your view?

I totally agree with that.

And obviously, the swap lines were, were, uh, hadn't been used before

and were put in place and expanded.

But the.

FEMA, uh, facilities were, were I think what you're referring to, along

with many others, which basically just provided kind of a, um, a guarantee or

insurance that, uh, other central banks would have access to dollar assets.

Uh, and I think it really calmed a global markets to know that those

facilities were out there and available.

Uh, and, and I think they had a huge impact.

Okay, so, yeah, so we'll, we'll close, we'll close with this, um, three

cheers from both of us for the Fed's early response to the, to the pandemic

induced recession and financial, and potential financial panic and turbulence.

Well, the verdict's yet to be, yet to be fully in, I think,

on their later responses.

That's my view, and I guess that's your view as well?

It is, it is.

I, I, you know, I, I, I think it's a little unfair, uh, with, with the,

with hindsight to, uh, sometimes say, uh, things, uh, because in

the moment we might, might've made other choices, but, um, certainly

with hindsight, it seems that not just the Fed, but most central banks

continued expansionary policy too long.

Yeah.

Okay.

Thanks so much, Catherine.

That was a really, uh, illuminating conversation.

I really enjoyed it.

And, uh, very clear.

I hope that, uh, some of your tremendous knowledge and expertise

on this subject got transmitted successfully to our audience.

I think it did.

Thanks so much.

Well, thank you.

It was great talking with you.

Okay.

Take care.

Bye bye.