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Central Banking in an Era of Quantitative Easing


  • Andrew Sheng


This paper compares central banking in the era of Bagehot's Rule (1873) and the current era of quantitative easing (QE) and zero (or near-zero) interest rate policy (ZIRP) to suggest that our analytical frameworks need updating. It also proposes some rules for emerging-market central banks to follow today. Bagehot's Rule—that in a financial crisis, the central bank should lend freely against good collateral, and at market interest rates—can no longer apply in an age when the gold standard has been abandoned, hard budget constraints have disappeared, and the national perspective of central banks limits their ability to regulate a shadow banking system that is global in nature. Central banks in reserve currency countries have used QE and ZIRP because the political will to stem excess consumption and raise taxation is lacking. Central banks in emerging markets might avoid the domestic collective-action traps that the deficit countries have fallen into by applying a systems-wide analytical perspective. This would involve privileging diversity, imposing a strict limitation on concentration, the promotion and regulation of the commons, and increased taxation.

Suggested Citation

  • Andrew Sheng, 2011. "Central Banking in an Era of Quantitative Easing," Economics Working Paper Archive wp_684, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_684

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    Cited by:

    1. Grung Moe, Thorvald, 2015. "Shadow banking: policy challenges for central banks," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(2), pages 31-42.
    2. Mettenheim Kurt, 2013. "Back to Basics in Banking Theory and Varieties of Finance Capitalism," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 3(3), pages 357-405, May.

    More about this item


    Bagehot's Rule; Quantitative Easing; Zero Interest Rate Policy; System-Wide Analysis to Central Banking Policies;

    JEL classification:

    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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