Does persistent below-target inflation in the UK since 2014 imply that quantitative easing has failed? Should the central bank consider adopting other ’unconventional’ policy tools such as negative interest rates?
1. Describe what you found when checking the Short-Term OMO Categories
Firstly, those Short-Term OMO categories appeared on both sides of the balance sheet.
Secondly, for the period when Short-Term OMO appeared on asset side of the balance sheet, it didn’t appear on liabilities side of the balance sheet, apart from few months pre QE announcement by BoE.
2. Describe what you found when checking total assets and liabilities
When checking total assets and liabilities, I found that BoE balance sheet on both sides increased significantly as of September 2008, when Bank of England purchased assets using Short term OMO.
3. Describe the differences between the three balance sheets you constructed above. Can you explain these differences?
So the main differences between three balance sheets were:
A) Snapshot in difference in time
B) The total assets and liabilities increased (BoE balance sheet) massively.
C) That in 2007 snapshot, short term OMO only appeared on asset side of the balance sheet. Whereas in 2009 snapshot, short term OMO were used and appeared on both sides of the balance sheet. And then in 2014 snapshot, short term OMO appeared on liabilities side of the balance sheet.
4. Can you detect any connection between GDP and the BoE balance sheet? Describe what you find.
There is a clear connection between GDP and the BoE balance sheet – a large drop in GDP triggered a large increase in BoE balance sheet, due to fact that interbank markets reduces (partially stopped) ensuring the smooth dissemination of reserve balances among commercial banks, in order to self-assure against potential credit risk with counterparties.
Relation to GDP and the BoE balance sheet findings were more than noticeable – in beginning of 2008 GDP growth was approx. 1.3%, and by end of 2008 it dropt to approx. -1.6%. As a result of decline of economic activity in economy, BoE pretty much tripled its value of balance sheet in the same period of time.
5. Which other variables did you identify above? Describe what you found.
Firstly, I identified inflation level using CPI measure. I found that from September 2008 till September 2009, inflation dropt from 5.2 % to 1.1% accordingly.
Secondly, the lending rate to Private sector saw a deep decline foe the same period of time mentioned above. Additionally, the lending rate that we saw pre crisis has never picked up to the same level again.
Thirdly, bond yield on 10 year on government stock and 5 year on Government Securities. Findings were astonishing – there was a significant drop in both bond yields from June 2008 till December 2008. So yield on 5-year government Securities dropt from approx. 5.3% to 2.7% accordingly to the dates mentioned above.