“Helicopter money”: A practical guide for markets

June 11, 2016

If current non-conventional monetary policies fail to contain deflation risk, some form of debt monetization or “helicopter money” will become a policy option. The barriers are high but not insurmountable in the G3. Policies could range from a simple combination of QE and fiscal expansion to outright central bank funding or debt restructuring. If and when monetization of government debt becomes apparent the consequences for financial markets would be profound: the policy response to deflation risk would no longer drive bond yields lower but higher.

(more…)

The “de-anchoring” of inflation in the euro area

April 16, 2016

Two recent empirical studies highlight the risk that inflation expectations in the euro area are becoming de-anchored, similar to Japan. De-anchoring means that short-term price shocks can change long-term expectations. Importantly, the papers suggest medium- and short-term measures to track this de-anchoring. De-anchoring increases the risk of actual deflation and may add to the risk premia on equity and credit.

(more…)

U.S. natural interest rate stuck at 0%: evidence and consequences

March 12, 2016

Federal Reserve research supports the view that the natural rate of interest in the U.S. has not recovered from its plunge to an unprecedented historical low of close to zero after the great recession. This bodes for protracted problems with the zero lower bound emphasizing the ongoing importance of asset purchases and other non-conventional policy options for central bank credibility.

(more…)

The limitations of ECB bond purchases

March 5, 2016

The European Central Bank’s public sector bond purchases are sizeable and their pace may increase further. However, issue and issuer limits constrain their time horizon. For monetary easing to remain credible and powerful the purchase of uncovered bank bonds and corporate bonds may have to be considered.

(more…)

Why money markets remain vulnerable

February 20, 2016

New theoretical work shows that money markets remain fragile as long as there is a connection between asset prices, secured funding and unsecured funding. The degree of fragility depends on leverage in the financial system. Central banks can alleviate acute liquidity stress but cannot easily reduce financial system leverage. Hence fragility remains even with ultra-easy monetary conditions.

(more…)

What we can learn from the “fiscal theory of inflation”

February 13, 2016

Fiscal policy is as important as monetary policy for inflation dynamics. Government debt has features similar to money and affects private wealth and prices. In particular, if monetary policy protects debt sustainability expansionary fiscal policy is inflationary and restrictive fiscal policy is dis-inflationary or deflationary. Moreover, high interest rates are inflationary and low interest rates are deflationary.

(more…)

Non-conventional monetary policy and global finance

January 23, 2016

Empirical evidence shows that non-conventional monetary policy in large advanced economies has shaped financial conditions in the rest of the world. In particular, non-conventional easing has boosted EM bank balance sheets and securities issuance. This goes some way in explaining why the emerging world has become so vulnerable to even just tapering of these policies.

(more…)

The secular decline in the global equilibrium real interest rate

January 2, 2016

A new Bank of England paper finds a 450 bps decline in global equilibrium real interest rates over the past 35 years, due to a fundamental divergence: savings preferences surged on demographics, inequality and EM reserve accumulation, while investment spending was held back by cheapening capital goods and declining government activity. More recently, fear of secular stagnation has compounded the real rate compression.

(more…)

Collateral framework: risks and policies

December 27, 2015

The rising importance of high-quality collateral for financial transactions brings new systemic risks, such as potential collateral shortages and secured funding constraints in crisis times. Vulnerabilities are augmented by collateral optimization, transformation, re-use and re-hypothecation. Collateral policy has become an important part of central banks’ toolkit.

(more…)

The role of macroprudential policy

December 5, 2015

Macroprudential measures are often seen as a counterweight to ultra-easy monetary policy in the developed world. BIS research cautions against this expectation. Macroprudential policies are largely new and untested, have worked best as a complement (not offset) to monetary policy, and focus on specific sectors, such as banking and housing.

(more…)

Tags

Tags
asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

FOLLOW US
Linkedin
LEGAL
Research
Quantamental Academy
About Us