The institutional and cultural foundations of the Federal Reserve's and ECB's non-standard policies

For institutions that are so inclined to «boring» policy-making as the Governor of the Bank of England once put it, central banks' recent adoptions of non-standard policies has been remarkable. With benchmark rates at or close to zero, a number of central banks in the advanced economies launched innovative programs and facilities and used their balance sheet to mitigate financial instability and support economic recovery. In spite of their common policy goals, central banks' unconventional monetary policies (UMPs) vary considerably in scope and design across advanced economies. The variation in UMP is perhaps most vividly illustrated by the UMPs of the two most prominent central banks: the European Central Bank (ECB) and the US Federal Reserve (FED). Why did the ECB and the FED design different UMPs? Specifically, why did the FED rely extensively on balance sheet policies such as asset purchase interventions rather than on non-standard liquidity facilities like the ECB? Why did the two central banks adopt different types of forward guidance? Using the comparative insights from the case studies, we argue that variation of UMPs cannot be satisfactorily explained by economic and financial fundamentals alone. Explanations that emphasize the influence of cultural identities as enshrined in the legal mandates of the two central banks are also insufficient to account for policy variation. We therefore suggest additional factors that enhance the explanation for why the ECB and the FED formulated different UMPs during the crisis. Specifically, we argue that the decision-making systems of the central bank's monetary policy setting body and the accountability relationship that tie the central bank to policy-makers also matter in the design of UMPs.