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Reversing unconventional monetary policy: technical and political considerations

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  • Buiter, Willem H.

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.

Suggested Citation

  • Buiter, Willem H., 2009. "Reversing unconventional monetary policy: technical and political considerations," CEPR Discussion Papers 7605, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7605
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    References listed on IDEAS

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    1. Holinski Nils & Kool Clemens & Muysken Joan, 2009. "International Portfolio Balance – Modeling the External Adjustment Process," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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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.

    More about this item

    Keywords

    Credit easing; Enhanced credit support; Quantitative easing; quasi-fiscal policy; regulatory capture;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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