— DNB Research Conference 2017 — Discussion ‘Non-Neutrality of Open-Market Operations’ by Pierpaolo Benigno and Salvatore Nistico Vivien Lewis KU Leuven & Bundesbank1 10th October 2017 1 The views expressed herein are solely those of the discussant and in no way re‡ect the views of the Bundesbank or the Eurosystem. V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 1 / 9
What the Paper Does Motivation Unconventional monetary policy (MP) ) income losses on central bank’s (CB) balance sheet ) e¤ects on in‡ation and output Question Under what conditions is - broadly de…ned - MP neutral? Approach Closed economy model 3 actors: treasury, central bank, households Treasury and CB have separate budget constraints Importance of transfer schemes between actors V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 2 / 9
What the Paper Finds Main result: General Neutrality Property With unconventional monetary policy, CB bears some risk which before was in hands of private sector If private sector ultimately bears this risk, equilibrium prices and quantities do not change Treasury must tax households and transfer taxes to CB to cover losses ) Neutrality breaks down if some risk remains with CB or treasury V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 3 / 9
Outline Praise I learned a lot from reading this paper. Thank you! Two Comments Authors coin the term ‘Impossible Trinity in Central Banking’ - is this term well-chosen? Paper is rather theoretical - would bene…t from some real-world examples and calibration exercises V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 4 / 9
A New Term: ‘Impossible Trinity in Central Banking’ Central bank can’t have simultaneously: Independent interest rate policy 1 Independent unconventional monetary policy 2 Control over its pro…t/loss: ‘…nancial independence’ 3 ) Basically says that central bank’s budget constraint has to hold Do we ever need both policies (1) and (2) at the same time? Unconventional MP relevant only at zero lower bound (ZLB) But at ZLB, independent interest rate policy impossible anyway ) Under this view, term ‘Impossible Trinity’ is a misnomer V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 5 / 9
Can Apply Original ‘Impossible Trinity’ to Central Banking Open economy central bank can’t have simultaneously: Independent interest rate policy 1 Independent exchange rate policy 2 Control over its pro…t/loss: ‘…nancial independence’ 3 ) Central bank has to accept loss arising from int’l capital mobility This ‘Impossible Trinity in Central Banking’ has always existed ...even with old-style central banking Exchange rate policy is optional; CB chooses two out of (1),(2),(3) ) In closed economy, term ‘Impossible Trinity’ is misleading V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 6 / 9
What Happens when Central Bank makes a Loss? Bundesbank Act, § 27 Distribution of pro…t: 20% of the pro…t, but at least e 250m, shall be transferred to the 1 statutory reserves until they equal e 2.5bn; [...] the balance shall be paid over to the Federal Republic of Germany 2 No automatic transfer from Treasury to cover income losses Instead, provisions for ‘general risks’ amounting to e 15.4bn ECB Convergence Report, May 2012 The event of an NCB’s net equity becoming [...] negative would require that the respective Member State provides the NCB with an appropriate amount of capital [...] within a reasonable period of time so as to comply with [...] …nancial independence Meaning of appropriate and reasonable? Enforcement? V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 7 / 9
stability." J. Weidmann, February 2017, FAZ-interview "It is not our job to deliver a profit, but to safeguard price Bundesbank Balance Sheet Profit/Loss (-), million € 14000 12000 10000 8000 6000 4000 2000 0 -2000 -4000 -6000 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Financial Independence Then and Now Bundesbank made losses in 1970s Financial independence was thus undermined Losses kept on books until su¢cient pro…ts accumulated in later years (Why) does …nancial independence matter now? With exchange rate risk, losses limited in size and duration With interest rate risk, potential losses (presumably) much larger ) Quantify and compare two types of risk to …nancial independence V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 8 / 9
Wrapping Up: Two Main Comments Term ‘Impossible Trinity in Central Banking’ Arguably, unconventional MP only ever relevant at ZLB For open economies, concept existed all along Actual policymaking Which transfer schemes exist in practice? Quantify risks to …nancial independence coming from di¤erent sources V. Lewis (KU Leuven & Bundesbank) Discussion Benigno-Nistico 10th October 2017 9 / 9
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