After the emergency of the new variant of covid named Omicron (as Greek, let's call it o), bringing back up all the climb risk appetite with the greed level of markets dropping. Let's go back to remember an another case of a systemic crisis that bring and escalated to the global financial markets starting as a a mortgage crisis with over-indebtedness targeting buyers of low-income homes, excessive risk-taking by financial institutions and the creation of the United States real estate bubble. The initial approach with monetary policy tools with reductions in stock requirements, ie the required reserve that should be available and maintain the banking system (overnight at the treasuries or at the central bank), discount rate fluctuations charged by central banks to commercial banks as well as in open market operations with the central bank buying securities by adding cash to banks' reserves was found to be unsuccessful. It thus created the need to resort to a monetary policy to address the liquidity trap where it had been created.
The measures taken by the central banks such as (FED, ECB, BOC, BOJ, BOE) were aimed at quantitative easing, increasing the size of their balance sheet, which was mainly done by selling bonds as a rule with the primary goal of changing the overall reserve offer of the economy as they were formed and the amount of money stimulating market liquidity. But also the quality relaxation regarding the change of the structure of the data that the central bank has in its balance sheet as the assets where it held may have an increased risk in the relative price changes that may have an inflationary tendency. And finally with the commitment to provide future guidance to keep short-term interest rates low in order to help meet future monetary policy expectations.
Non-conventional instruments contributed to the easing of monetary policy after the zero interest rate was reached. Most studies find the cumulative effects of quantitative easing and future guidance on long-term government bond yields significant. Negative interest rates have been a very effective tool in reducing bond yields and the short-term yield curve that fell below zero after their implementation. Unconventional monetary policy has helped reduce corporate returns, raise stock prices and devalue the exchange rate.
It is observed that non-conventional monetary policy tools are more effective in times of heightened economic hardship where quantitative easing needs to be stronger and less effective when deflationary pressures increase.
