Quantitative Easing by the ECB and the Federal Reserve

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INTRODUCTION 
The great financial crisis erupted unexpectedly during the last decade in the USA and then, 
due to globalization, expanded around all the world, and so also in Europe, has represented a 
turning point, not only from an economic point of view, but also political, beyond which 
things did never come back as before.  
Due to the fact that the financial crisis, and the subsequent economic recession, has upset the 
economies and the banking systems of many countries, since 2007 the main Central Banks 
have taken measures so strong to face the crisis that what would be considered exceptional in 
normal times has become normal. 
Exactly because the use of these tools has become daily, and given that such maneuvers  
directly affect from several years the political and the economic situation of many countries 
around the world, it has become extraordinarily important understand them in order to make 
them more and more useful in the future, if they will be still necessary. 
It is for this reason that I will dedicate three chapters to describe in details the recipes utilized 
by the two most important  Central Banks, the Fed and the ECB, to cope with this great 
financial crisis. 
Before to know which recipes, or monetary policies, the two Central Banks employed for this 
aim, it is important to understand what they consist of. This is the reason because of which, in 
the Chapter 1, I will describe first of all the general framework in which they operate to obtain 
certain objectives. 
Such framework is constituted by a hierarchy of targets, characterizing the transmission 
mechanism of monetary policy, based on how much all the variables are related to the final 
aims. 
Then, I will focus on the evaluation of the monetary policy effectiveness, bound to some 
dimensions, and to complete the issue I will describe several strategies pursued to maximize 
it. 
Only after have described all the instruments utilized by the policymakers, I will mark a 
boundary between the conventional measures, pursued in normal times, and those 
unconventional, implemented in time of crisis. The demarcation line flows on whether for the 
Central Banks it is possible to continue to manage the key short-term interest rates, by 
lowering it more until enter in negative territory, where now is situated the lower bound.
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When such bound is reached, they have to resort to other two means described soon after, 
which are the forward guidance, aimed to affect the expectations on the short-term rates, and 
the portfolio-balance channel, when the Central Banks widen their balance sheet by 
purchasing private or public assets. 
In the second half of the Ch.1, I will describe all the unconventional measures included in the 
second mean, with the addition of  related advantages and disadvantages. These measures are 
the credit easing, including purchases of private assets, direct or indirect depending on 
whether the Central Banks buy them directly or against collateral, and the quantitative easing, 
including purchases of public sector bonds. 
And so, throughout the thesis, I will describe all the unconventional measures taken by the 
main Central Banks on the basis of this distinction, without considering them all forms of 
quantitative easing, as the thesis title seems to suggest. 
I will close the Ch.1 with a brief description of the unconventional policies pursued by the 
Bank of Japan and the Bank of England, before to pass for a more detailed treatment 
regarding the Fed and the ECB. I will do it for two reasons: about the BoJ, because it 
represented the first example of pure quantitative easing of the history, and to underline the 
difference with what the Fed considered as “quantitative easing”; about the BoE, in order to 
create a comparison term between the ECB and a country still in the EU, although the Brexit. 
Subsequently, in the Ch.2, after have briefly illustrated how the financial crisis burst in the 
USA, I will describe all the measures carried out by the Fed, that had two goals. 
In the first phase, they were aimed to revive the financial system (firstly through conventional 
measures; then, after the Lehman Brothers’ collapse, through those unconventional). They 
included different forms of credit easing, both direct and indirect.  
Soon after, there was the necessity to face the expanding economic recession, and so the Fed 
implemented 3 rounds of QE, by purchasing in the first round mainly Agency debt and 
Agency MBS, while then more and more Treasury securities. At the end of the description of 
all the single rounds, I will briefly expose their singular impacts both on the financial and 
macroeconomic variables. 
Towards the end of chapter, exactly after have mentioned the tapering from QE, I will 
describe in details the improvements obtained by the QE, but also the factors that could 
undermine the recovery in the long period. I will end the chapter by reporting the last attempts
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to normalize the monetary policy, started with the tapering and continued with the federal 
funds rate raise. 
Then, I will write the Chapter 3, the last of my thesis, focused on the measures carried out by 
the ECB, in a symmetric way with respect to the Ch.2. 
In fact, due to the financial crisis expanded in Europe through the globalization, also the ECB 
was forced to take some measures, aimed in the first phase to restore the financial system 
(also in this case, until the September 2008 they were mainly conventional; then, obviously, it 
became necessary resort to unconventional means).  
These means included mainly several forms of indirect credit easing, since in Europe the ECB 
mainly provided funds to the private sectors through the banks, differently from the Fed that 
bought mostly debt instruments from non-banks. 
Subsequenlty, the macroeconomic recession was felt also in Europe since the 2010, when 
some countries were about to collapse on their sovereign debt. For this reason, it was 
implemented a first form of quantitative easing (SMP), aside from the institutional of some 
mechanism for the financial stability for the emergencies ( incorporated after some years in 
the actual ESM). 
By the way, these attempts initially failed in uplifting the stressed countries from the 
defaulting and so the feared contagion effect expanded to other countries in the euro area. The 
situation did not improve during the following years, when the OMT programme was 
announced, but never started. 
Only since the 2014 it occurred a stronger reaction from the ECB through the implementation 
of different unconventional measures, among which mainly the APP, that included both the 
quantitative easing and the direct credit easing still in course.  
Due to some events occurred during the second half of 2015, to whom I will dedicate a 
paragraph apart, these measures became stronger in the 2016, until arrive nowadays when, 
due to the improvements of both several financial and economic indicators, a debate about the 
possibility of tapering is in course (on this debate I will close my thesis).  
But before to do it, as I will do for the Ch.2, also in this case I will dedicate a section to 
describe carefully the improvements in all the different variables occurred through the ECB’ 
QE, but also the reasons that, during the overall course of QE, most likely are slowing down 
its impact on the economic revival and to which skeptics about tapering appeal.
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The reasons that I will explain in this section are, for the most part, at the basis of the 
difference in the reaction to the financial crisis and in the impacts obtained through the 
unconventional measures between the Fed and the ECB. 
The differences between the contexts in which the two Central Banks operate, in the USA and 
Europe, represent the supporting column of my thesis, not only in the introductions to Ch.2 
and 3 or in the conclusions, but also in the whole thesis, and maybe represent the main reason 
that justifies the elaborated discussion of the assigned topic.
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CHAPTER 1: 
THE TRANSMISSION OF MONETARY POLICY AND THE UNCONVENTIONAL 
MEASURES
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1. THE GENERAL FRAMEWORK OF MONETARY POLICY 
The operations concerning monetary policy are really complex. In fact, they exert their effects 
with variable time lags, and/or they could meet some difficulties that might hinder their 
effectiveness.  
The attempt to evaluate such operations, and so also their effectiveness, is not easy both 
because it’s difficult to separate the effects related to monetary policies from those related to 
fiscal policies or to other financial institutions and because it’s not easy to forecast what 
would have happened if these policies had not been implemented (Klyuev, De Imus, 
Snirivasan 2009).  
But the main reason is the fact that the Central Bank cannot affect or control directly the 
ultimate goals (as, for example, price stability, employment, growth, the balance of payments 
equilibrium, etc.), but it needs to do it by checking the behavior of other variables more or 
less tied with the final aims.  
Since the market conditions are often uncertain, there could be the necessity, by the Central 
Bank, of some adjustments on such target variables in order to reach the desired level useful 
to affect the overall policy as expected ( Acocella 2005). 
This is the reason why it is said that the monetary policy is based on the “transmission 
mechanism”. In normal times, the Central Bank, by caring only to steer the level of the policy 
interest rates, is able to handle the liquidity conditions in the money markets and keep the 
price stability over the medium term ( Bini Smaghi 2009). 
In such a way, during  normal times a Central Bank doesn’t lend directly to the private sector 
nor the government, neither does it purchase directly government bonds, but in order to reach 
the main aims it only cares about managing the level of the money-market interest rate  
(Korniyenko 2015) . 
But during the present time of crisis, when the Central Bank has already pushed the policy 
interest rate down to zero or near this value ( zero lower bound), while the economy still 
needs a further monetary stimulus in order to avoid to fall into a deflationary spiral, there’ s 
the necessity to take in consideration alternative monetary actions, classified as 
“unconventional”, which gained momentum after the 2008-09 global financial crisis among 
all the most important money makers around the world (Acocella, Di Bartolomeo, Hallett 
2016; Moenjak 2014; Roache, Rousset 2013).
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Recourse to these measures was heterogeneous across countries, because of differences in the 
structure of all the financial systems or in the dimension of market disruptions or in the 
Central Banks’ evaluations. This doesn’t make it easy to find neat conclusions about the 
effectiveness and the best duration of these measures, as witnessed by a growing literature ( 
Cecioni, Ferrero, Secchi 2011; Roache, Rousset 2013 ). 
The necessity to implement such policies arises in a situation of an impaired transmission 
mechanism.
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2. TRANSMISSION SCHEME: THE HIERARCHY OF TARGETS 
2.1. From the intermediate targets to the indirect instruments 
As said, a transmission mechanism is accomplished by achieving several variables more or 
less “far” from the final aims. 
In order to reach these objectives, this transmission mechanism should depart from those 
variables more distant, because less related to the final aims, until arrive to pursue these last 
ones. For this reason there’s a hierarchy between all the targets. 
In fact, monetary policy tries to reach the so-called “intermediate targets”, that are variables 
affecting the ultimate goals. Among them, we can recall the monetary aggregates as 
“monetary credit”, composed by the sum of monetary base financing Treasury provided by 
Central banks plus bank lending to private sector, or money supply ( affected by the latter), 
the long-term interest rates, other forms of credit targets and exchange rates ( Acocella 2005).  
By the way, these variables are affected by other variables, which are less related to the final 
aims than the intermediate targets and whose trend is affected by the monetary measures 
taken in subsequent periods, since the moment when the monetary impulse is transmitted  
(Acocella 2005; Cecioni, Ferrero, Secchi 2011). 
In fact, before this, in order to reach the objectives, the Central Banks transmit their choices 
firstly to the interbank market, by influencing the monetary base of banks and the short-term 
interest rates, which are effectively the “operating targets” which occupy a middle position 
between the intermediate targets and the real monetary policy instruments (Cecioni, Ferrero, 
Secchi 2011; Acocella 2005; Pailwar 2014). 
These two operating targets, together with credit targets ( which are intermediate targets) 
could be classified between the “direct instruments”, so called because they could be directly 
affected by monetary authorities without any lag; instead, among the “indirect” ones ( the real 
instruments I was mentioning before influencing operating targets, as we will see), there are:  
 The open market operations, which are Central Banks transactions with banks, 
implemented by Central Banks’ choose. This instrument could be divided into 2 main 
kinds:  
- sales or purchases of assets, in general debt securities; 
- lending operations, conducted in general through auctions.
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 The standing facilities, which are Central Banks operations, but this time born by 
banks’ initiative, and we can distinguish 3 kinds of facility: 
- discount facility: banks can sell some short-term shares to Central Bank at any time, 
which establish discount rate suitable to calculate the price depending on securities’ 
returns; 
- overnight borrowing facility: banks can borrow at any time, with the guarantee of a 
collateral, at a specified rate fixed by Central Bank; 
- deposit facility: banks can deposit at any time funds at Central Bank, which 
remunerate them at a specified rate. 
The first two are liquidity-providing facilities, the last one is liquidity-absorbing. 
 The reserve requirements: for banks it’s compulsory to hold a minimum level of 
deposits in their account at Central Bank, applied to single day-ends or an average of a 
period of time like one month, always checked from end-of-day values, whose amount 
for every bank depend on specific items on its balance sheet that should be reported 
every month (Bindseil 2014; Buzeneca, Maino 2007; Acocella 2005). 
2.2. Eligibility requirements for instruments 
The instruments choice is not easy, but in order to do it is important that they respect some 
main requirements: 
 they should ensure the link between intermediate targets and the final objectives; 
 they should be controllable by Central Banks; in the sense that they could be changed 
flexibly as needed, in the amount desired, frequently or seldom, also quickly ( 
sometimes in the same day ), independently of the initiative of the other banks and 
within the established monetary policy parameters; 
 they should be thought in such a way that they create a correlation between the banks 
and the Central Bank as explained before; 
 they should be implemented in such a way that the exchange rate policy is compatible 
with the domestic interest rate policy; by sterilizing some consequences due to the 
intervention on the monetary base; 
 they should be chosen in such a way that the monetary policy should be understood 
and, in a certain way, foreseen by the market; 
 they should be efficient and effective, in the sense that they should transmit the policy 
signal in an efficient way in order to achieve the Central Bank’ s aim ( Wadsworth, De 
Juvigny 2012; Bofinger, Reischle, Schachter 2001; Mohr 1996).