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International experiences and domestic opportunities of applying unconventional monetary policy tools

Author

Listed:
  • Judit Krekó

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Csaba Balogh

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Kristóf Lehmann

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Róbert Mátrai

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • György Pulai

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Balázs Vonnák

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

This paper provides an overview of the impact of unconventional central bank instruments, the relevant international experiences and the room for application in Hungary. The use of unconventional instruments may be justified by the existence of financial market friction, turmoil, failure or constraint, when instruments that change the size and/or composition of central bank balance sheets may be more efficient in achieving monetary policy objectives than traditional interest rate policy. Empirical analyses found the unconventional instruments applied in developed countries successful in easing market tensions, increasing market liquidity and reducing yields. Although they proved to be unsuccessful in providing a boost to economic growth, they were able to mitigate the fall in lending and output. Vulnerable emerging countries with a lower credit rating and high external debt have much less room for manoeuvre to apply non-conventional instruments. Even liquidity providing instruments, which are otherwise considered the least risky, may result in exchange rate depreciation and flight of capital during a crisis. The interventions that involve risk taking by the government may add to market concerns about fiscal sustainability. Due to Hungary’s vulnerability, high country risk premium and large foreign exchange exposure, most of the instruments applied in other countries would entail financial stability risks at home. In theory, the sharp reduction in the supply of bank credit could provide sound justification for the use of unconventional central bank instruments in Hungary. It should be noted, however, that insufficient credit supply is mainly attributable to a lack of willingness by banks to lend, which can be less influenced by the Bank, rather than to any lack of capacity to lend. In addition to banks’ high risk aversion, uncertain macroeconomic environment and economic policy measures affecting the banking sector also decreased willingness to lend, which is beyond the authority of the central bank. Therefore, these instruments at most may have a role in preventing a possible future deterioration in banks’ lending capacity from becoming an obstacle to lending in a turbulent period.

Suggested Citation

  • Judit Krekó & Csaba Balogh & Kristóf Lehmann & Róbert Mátrai & György Pulai & Balázs Vonnák, 2013. "International experiences and domestic opportunities of applying unconventional monetary policy tools," MNB Occasional Papers 2013/100, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:opaper:2013/100
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    File URL: http://www.mnb.hu/letoltes/op100.pdf
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    References listed on IDEAS

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    Cited by:

    1. Giscard ASSOUMOU ELLA & Cécile BASTIDON & Philippe GILLES, 2014. "International Prices, Monetary And Income Shocks: A Svar Model Of The External Trade Channel In African Economies," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 14, pages 85-116, December.

    More about this item

    Keywords

    monetary policy; unconventional tools; financial intermediation;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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