As with monetary policy, both operate subject to statutory objectives and remits set by Parliament. And as with monetary policy, each is subject to rigorous accountability mechanisms enforced by Parliament. Both FPC and MPC have instrument, but not goal, independence. These institutional features have attractions as a response to the time-consistency dilemma which faces financial policymakers. The Bank of England is an institution with around 320 years of history. Financial crises have pock-marked its history. This ought to provide the Bank with the institutional memory necessary to make sense of dots on distant horizons, to diagnose emerging obesity in the financial system’s tails, to conscientiously object to next time appearing different. The primary objective of the FPC is to preserve the resilience of the financial system and, subject to that, to support the government’s objectives including for employment and growth. That ordering of the FPC’s objectives helps lean against short-term pressures to go for growth today at the cost of instability tomorrow. In effect, the FPC provides the longsightedness necessary to preserve future stability at a time when private risk horizons may be shortening. And it provides necessary insurance against future tail risks at a time when these tails may be fattening. This macro-prudential regime, with the FPC at its centrepiece, is an explicitly institutional solution to the financial policy dilemma. It is regulation of the system for the system: of the system because the FPC’s focus is system-wide; for the system because the FPC’s aim is stability in the wider economy.
Andrés, López-Salido and Nelson (2004) incorporate imperfect substitutability between short- and long-term bonds. Here the lack of a secondary market for long bonds is the source of the friction. In this model, base money expansion by a central bank can relieve portfolio constraints and lead to an increase in demand for long bonds, thereby raising their prices. Much of this literature is still in its infancy and there is some way to go before it can be combined within an applied, quantitative model that policy makers can use. But the central message I take from this work is that there are a number of channels through which monetary policy is likely to be able to influence the economy at the zero bound. Unfortunately, the financial crisis meant that we had to put these insights into practice. When doing so at the Bank, we placed weight on three key channels of monetary transmission: the impact of imperfect substitutability and the portfolio rebalancing channel on relative prices, the role of financial market liquidity, and the importance of expectations. All three channels were important in the design of the Committee’s asset purchase programme. Let me take them in turn. Channels of transmission To date, the Bank has purchased £ billion of assets financed by the issuance of central bank reserves, the vast majority of which have been relatively long maturity gilts. The central objective underlying those gilts purchases was to inject a substantial amount of additional money into the economy.