The Only Game in Town

Thus far, central banks have been willing to step where politicians fear to tread, finding new and increasingly unconventional ways to try to influence the direction of troubled economies. But they must be able to admit when they are out of bullets.

TOKYO – What should central banks do when politicians seem incapable of acting? Thus far, they have been willing to step into the breach, finding new and increasingly unconventional ways to try to influence the direction of troubled economies. But how can we determine when central banks overstep their limits? When does boldness turn to foolhardiness?

Central banks can play an important role in a cyclical downturn. Interest-rate cuts can boost borrowing – and thus spending on investment and consumption. Central banks can also play a role when financial markets freeze up. By offering to lend freely against collateral, they “liquify” assets and prevent banks from being forced to unload loans or securities at fire-sale prices. Anticipating such liquidity insurance, banks can make illiquid long-term loans or hold other illiquid financial assets.

To the extent that unconventional monetary policy – including various forms of quantitative easing, as well as pronouncements about prolonging low interest rates – serves these roles, it might be justified.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/uJT5gvb;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.