Principles of Unconventional Monetary Policy: A Comparison between Federal Reserve System and European Central Bank (in Korean)

In responding to the Global Financial Crisis, both the Federal Reserve Board (FRB) and the European Central Bank (ECB) have introduced various kinds of "unconventional" monetary policy measures. This paper compares the backgrounds and principles of the unconventional monetary policy conducted by these two central banks. FRB's unconventional measures can be classified into two groups: ones for financial stability and the others for economic stability. The first group of measures - introducing new liquidity supply facilities, intervening MMF markets, for example - has been basically guided by the Bagehot's dictum. Operation twist and quantitative easing fall into the second group of measures, which has been adopted in order to influence longer-term interest rates directly while the short-term policy rate is stuck at the effective zero lower bound. FRB appears to acknowledge the sequentiality of conventional and unconventional measures as long as economic stability is concerned: first conventional then unconventional measures, and in exit, unwinding unconventional measures first before stating to raise the policy rate. In contrast, ECB makes it clear that unconventional measures have been designed and implemented focusing on its primary objective: maintaining price stability. As a result, ECB has emphasized equal treatment of all commercial banks within their ability to provide collateral, in providing liquidities. In fact, ECB mainly uses open market operations (longer-term refinancing operations, in particular) and provides whatever amount of liquidity to commercial banks at its policy rate as long as collaterals are secured. In addition, ECB has a different view that unconventional measures can be deployed before the policy rate hits the zero lower bound, and that the policy rate can be raised before unconventional measures are withdrawn. These differences in principles for unconventional measures seem to reflect institutional and financial-market structure under which the two central banks operate.