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Ultra easy monetary policy and the law of unintended consequences

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  • William R. White
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    Abstract

    In this paper, an attempt is made to evaluate the desirability of ultra easy monetary policy by weighing up the balance of the desirable short run effects and the undesirable longer run effects—the unintended consequences. The conclusion is that there are limits to what central banks can do. One reason for believing this is that monetary stimulus, operating through traditional ("flow") channels, might now be less effective in stimulating aggregate demand than previously. Further, cumulative ("stock") effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the "independence" of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not "a free lunch," governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

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    File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0126.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 126.

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    Date of creation: 2012
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    Handle: RePEc:fip:feddgw:126

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    Keywords: Banks and banking; Central;

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    10. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
    11. Jan Kregel, 2011. "Was Keynes's Monetary Policy, a outrance in the Treatise, a Forerunnner of ZIRP and QE? Did He Change His Mind in the General Theory?," Economics Policy Note Archive 11-04, Levy Economics Institute, The.
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    13. David Beckworth, 1982. "Aggregate Supply-Driven Deflation and Its Implications for Macroeconomic Stability," Cato Journal, Cato Journal, Cato Institute, vol. 2(3), pages 363-384, Winter.
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    Cited by:
    1. Putnam, Bluford H., 2013. "Essential concepts necessary to consider when evaluating the efficacy of quantitative easing," Review of Financial Economics, Elsevier, vol. 22(1), pages 1-7.
    2. Winkler, Adalbert, 2013. "Der lender of last resort vor Gericht," Frankfurt School - Working Paper Series 206, Frankfurt School of Finance and Management.

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