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The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies

The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of... AbstractWe analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal des Économistes et des Études Humaines de Gruyter

The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies

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Publisher
de Gruyter
Copyright
© 2021 Walter de Gruyter GmbH, Berlin/Boston
ISSN
2153-1552
eISSN
2153-1552
DOI
10.1515/jeeh-2021-0037
Publisher site
See Article on Publisher Site

Abstract

AbstractWe analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets.

Journal

Journal des Économistes et des Études Humainesde Gruyter

Published: Dec 21, 2021

Keywords: balance sheet recession; market maker of last resort; qualitative easing; quantitative easing; unconventional monetary policies; B53; E43; E44; E51; E52; E58

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