That was justified theoretically by appeal to the comparative advantage of monetary over fiscal policy in controlling nominal demand or to Ricardian Equivalence or to the argument that fiscal expansions were harder to reverse than initiate. 2. Monetary policy was therefore assigned the primary role in short-term aggregate demand management, with policy conducted through the manipulation of a suitable short-run interest rate. BIS Review 111/2010  1  3. The monetary transmission mechanism operated mainly through longer-term interest rates, asset prices and expectations of future inflation. Expectations of future policy rates were central and credibility was key. These channels might be augmented by a weak credit channel but the banking sector generally was conspicuous by its absence, particularly in the New Keynesian synthesis models, which also dominated thinking within central banks. The importance accorded to expectations led naturally to an increased focus on communication and transparency. 4. The conduct of monetary policy was best delegated to an independent central bank, free of short-term political considerations. That was buttressed by academic thinking which drew attention to the potential time inconsistency of optimal policy when expectations of future policy mattered and which suggested that monetary policy was best delegated to conservative central bankers with long horizons. 5. Intermediate monetary targets were not useful, because of their unstable link with the ultimate objectives of policy (though that did not preclude them being helpful at times as indicators of future demand and inflation).
That is reflected in the fact that the ratio of the monetary liabilities of the banking system (broad money) to the monetary base has fallen sharply in both countries, as indeed it did in Japan a decade earlier. In its communications, the Bank of England has stressed the monetary impact of its asset purchases, but that has been on the quantity of monetary deposits in the banking system, not narrow money. Have these policies been effective? Or does Eggertsson and Woodford’s neutrality result apply? Studies of Japan’s earlier experience of quantitative easing suggested only rather modest effects. For instance, Bernanke et al. (2004) found that although the falls in government bond yields following bond purchase announcements were statistically significant, they were typically just a few basis points in magnitude. Nevertheless, over the period as a whole, the yield curve was somewhat lower than predicted by a macro-factor model of the term structure, consistent with some impact from unconventional monetary policy actions (including also the Bank of Japan’s zero interest rate policy). Oda and Ueda (2005) estimate bond risk premia using a structural macro-finance model and find that bond purchases had no significant effect in reducing those risk premia, though they do find that the zero interest rate policy reduced long-term rates by around 20–40bp.