The Changing Framework of Monetary Policy Operations

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Tuesday 18 September


New challenges, new risks
Jesper Berg, Senior Vice President, Regulatory Affairs and Ratings, Nykredit and former Head of Market Operations, National Bank of Denmark

In this opening session the course chairman will outline the evolution of central banks in managing domestic liquidity and the challenges facing contemporary monetary policy operations. Delegates will be invited to give a brief account of the main features of their current systems and the specific challenges they expect to face or are facing in monetary operations. The aim will be to outline the requirements for a successful operating framework and identify key topics of interest to the group for attention in later sessions.

Effective transmission of monetary impulses to markets
Benjamin Sahel, Head of Market Operations Analysis Division, European Central Bank

The widening of spreads in longer-term European money markets presented a significant challenge to the Eurozone's central bank. As rates diverged from the policy rate, the transmission of monetary policy threatened to breakdown and the central bank took extraordinary action. In this session, the speaker will discuss how the Eurosystem tackled this near-dislocation from an operational perspective and the lessons that can be drawn from this episode. Discussion will also consider the importance of the collateral policy in an era of elevated sovereign risk.

Workshop: a roadmap for monetary policy operations
Led by the chairman Jesper Berg

In this session, participants will discuss the findings of a questionnaire carried out among the group. Topics for discussion will include implementing policy, a comparison of monetary policy frameworks across jurisdictions and market interaction. Throughout the focus will be on practical solutions to real world issues. Conclusions will be drawn on emerging good practice in the field.

Wednesday 19 September


Changes in the Federal Reserve's operational framework: an assessment
David Altig, Senior Vice President and Director of Research, Federal Reserve Bank of Atlanta

"Extraordinary times call for extraordinary measures" was how Chairman Ben Bernanke explained the Federal Reserve's decision to develop and then implement unconventional monetary policy tools. In this session, the speaker will review the key elements of the programme of credit easing and their implementation and evolution. The speaker will compare these operations and their impact on the central bank's balance sheet with the unconventional policies implemented in the Eurozone and the UK. He will also discuss the question of paying interest on deposits and the choice of policy rate. The session will conclude with an assessment of the impact the Federal Reserve's polices have had on markets and the broader economy and the lessons other central banks can draw from the experience.

Capital flows: exchange rate regime and monetary policy
Frank Nielsen, Head of Market Operations, National Bank of Denmark

Capital mobility confronts central banks with some difficult choices in implementing monetary policy. This session will explore these in the context of a fixed exchange rate regime. Particular attention will be given to the use of instruments and choice of markets for domestic and foreign intervention. The impact on exchange rates, interest rates, yields and inflation will be considered.

Conducting monetary policy: sterilisation and capital inflows
Frank Nielsen, Head of Market Operations, National Bank of Denmark

While inflation targeting remains the fashionable way to make monetary policy, a ‘pure' approach is not possible in all markets. A number of emerging markets have for several years operated a ‘dual target' regime [as acknowledge by a recent IMF paper.] This session looks at the mechanics of this approach with the particular reference to sterilisation: the debt used to absorb the liquidity, the impact on markets and the implications for central bank profits and capital.

Challenges to monetary policy: the art of the graceful exit
Morten Bech, Senior Economist, Bank for International Settlements

With conditions in the financial markets and the real economy improving, central banks are considering ending the use of unconventional measures. However, when taking such steps, it is important to respect not only monetary policy objectives and the inflation outlook, but also increasingly the financial stability implications, in particular those for the banking sector. In this session, the speaker, drawing on new research, will illustrate how exit strategies from unconventional monetary policy measures are being implemented by selected central banks in the post-crisis environment. Discussion will focus on assessment of these banks and the lessons that can be learned.

Workshop: what is the future of central bank collateral policy?
Led by Morten Bech and Jesper Berg

The financial crisis turned traditional central bank collateral policy on its head. In 2011-12, heightened sovereign risk damaged the standing of paper central banks rely on. This session will explore the implications of these developments for collateral policy. What paper should central bank take? Should they wider the scope still further? Will things return to ‘normal'?

Thursday 20 September


The infrastructure of emergency liquidity assistance
Mattias Persson, Head of Financial Stability, Sveriges Riksbank

Recent events have shown that threats to the financial system can emerge suddenly and with intensity. It is at these crisis points that the central bank may be called upon to be the ‘lender of last resort' and provide emergency liquidity assistance. In this session the speaker will discuss their experiences of ELA as part of general crisis management and resolution and discuss practical examples of implementation. Further topics for discussion will include internal procedures for ELA - organisational structure, analysis plan, information strategy, plan for implementation and legal procedures.

Design of Auctions
Paul Fisher, Executive Director, Markets, Bank of England

Increasingly, monetary policy is implemented by steering short-term interest rates indirectly through the control of liquidity to the banking system. One established method of creating a flow of liquidity between the central bank and the market is to perform a tender or auction in which the central bank subsequently determines the flow of liquidity to be effected to or from any commercial bank. This process is, therefore, critically important for the effectiveness of monetary policy implementation. In this session the speaker will propose effective methods to develop an understanding of the incentives shaping bidding behaviour at such auctions.

Delivering accurate and timely liquidity forecasts

Olav Syrstad, Senior Economist, Norges Bank

In this session, the speaker will outline the key features of their liquidity forecasting system, discussing how this has changed and any plans for further development. The group will be invited to discuss the component parts of the forecast and the resources needed or producing it. Lessons will be drawn out with a view to distilling a good practical framework.

New uses for liquidity tools
Jagjit Chadha, Professor of Economics, Chair in Banking and Finance, School of Economics, University of Kent

This session will highlight the new uses central banks are putting liquidity or open market operations (OMO) to. Essentially to smooth short, or temporary, term shocks to the balance sheets of financial intermediaries, these short-term tools have developed significantly since the start of the financial crisis as extensions have been used to (i) provide ongoing liquidity to financial intermediaries; (ii) offset the zero lower bound of monetary policy and (iii) provide a new set of tools for macro-financial liquidity. The speaker will discuss these changes and compare the day-to-day forecasts required for OMOs with the requirements during crisis or stress periods.

Friday 21 September


Talk is not cheap: market interaction and communication
Kevin Gardiner
, Managing Director & Head of Investment Strategy, EMEA, Barclays Wealth

Monetary policy operations do not exist in isolation. In fact, central banks need to make sure they work with financial markets when implementing monetary policy. It is a collaborative as well as competitive space. The speaker will discuss from a private-sector perspective how central bankers should manage their relationship with the markets, what market priorities for central bank operations might be and how to consult with markets. Particular attention will be devoted to assessing how central banks communicated as markets started to seize up.

Effective communication and collecting market intelligence
Mika Pösö, Head of Communications, Bank of Finland

Central banks rely on their presence in financial markets as a means of generating intelligence that can be used to support other functions, particularly the emerging financial stability function. But to what extent should those involved with monetary operations be responsible for gathering this information and could it impact their relationship with market participants? This session will also consider the broader question of how the central bank can effectively communicate information to financial markets about its operations, objectives and policies.

Closing remarks
Led by the chairman

The course concludes with a session summarising the week's key themes and issues. Participants will identify and discuss how the experiences and ideas from earlier sessions could be specifically applied to their own institution's challenges.