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Reversing unconventional monetary policy: technical and political considerations

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  • Willem H. Buiter

Abstract

There are few if any technical problems involved in reversing the unconventional monetary policies - quantitative easing, credit easing and enhanced credit support - implemented by central banks around the world as short-term nominal interest rates became constrained by the zero lower bound. The two main obstacles to an early and easy exit from unconventional monetary policies are political. The first is a potential conflict between the central bank and the fiscal authority about the role of monetary financing in the fiscal-financial-monetary programme of the state. If there is a conflict about the role of seigniorage in closing the government’s solvency gap, the likely outcome is a win for the fiscal authority, except in the case of the ECB. The second political impediment to a prompt and painless exit from unconventional monetary policy is that scaling down the size of the central bank’s balance sheet and the scale and scope of its other interventions in financial markets and institutions is likely to reveal the true extent of the central bank’s quasi-fiscal activities during the crisis and its aftermath. The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm. Delay in the dropping of the veil is therefore likely.

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This chapter was published in:

  • Willem H. Buiter & Stefan Gerlach & Clemens J.M. Kool & José Viñals, 2010. "The Quest for Stability: the macro view," SUERF Studies, SUERF - The European Money and Finance Forum, number 2010/2 edited by Morten Balling, Jan Marc Berk and Marc-Olivier Strauss-Kahn.
    This item is provided by SUERF - The European Money and Finance Forum in its series Chapters in SUERF Studies with number 59-3.

    Handle: RePEc:erf:erfssc:59-3

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    Cited by:
    1. Charles Goodhart, 2010. "¿Cómo deberíamos regular el capital bancario y los productos financieros? ¿Cuál es el papel de los “testamentos en vida”?," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 12(23), pages 85-109, July-Dece.
    2. Helmut Wagner, 2010. "The causes of the recent financial crisis and the role of central banks in avoiding the next one," International Economics and Economic Policy, Springer, vol. 7(1), pages 63-82, May.

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