Question

Tools of Monetary Policy:

Name two nonconventional monetary policy tools and briefly explain what they are?

Answer 1

Forward guidance- For policy rates, pre-commitment to future monetary policy rates is contingent or unconditional. It uses communication and invests credibility to influence interest rates at longer maturities A forward guidance regime can be crucial because inflation can normally push real rates higher at the zero bound downside as well as upside shocks. If investors anticipate this "double risk" correctly, this translates into excessive expectations of the real rate. This can be prevented if the central bank is committed to maintaining "low" rates for a long time. Since the major financial crisis, all major developed central banks on the market have used explicit forward guidance.

Quantitative easing - Quantitative easing denotes monetary base expansion (central bank deposits and cash), usually by purchasing government securities. The Bank of Japan was the first major modern central banks to introduce "QE" when it began buying large-scale JGBs (Japanese government bonds) in 2001. Quantitative easing alone is not "printing money" because it is an exchange of monetary statements instead of buying goods and services against unbacked currency. In contrast, not all extensions of the central bank balance sheet are quantitative easing: