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

Author

Listed:
  • Giménez Roche Gabriel A.
  • Janson Nathalie

    (Finance Department, NEOMA Business School, Mont-Saint-Aignan, France)

Abstract

We 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.

Suggested Citation

  • Giménez Roche Gabriel A. & Janson Nathalie, 2021. "The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 27(1), pages 1-33, June.
    • Handle: RePEc:bpj:jeehcn:v:27:y:2021:i:1:p:1-33:n:1
    DOI: 10.1515/jeeh-2021-0037
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    More about this item

    Keywords

    balance sheet recession; market maker of last resort; qualitative easing; quantitative easing; unconventional monetary policies; B53; E43; E44; E51; E52; E58;
    All these keywords.

    JEL classification:

    • B53 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Austrian
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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