Working Paper: CEPR ID: DP7605
Authors: 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.
Keywords: credit easing; enhanced credit support; quantitative easing; quasi fiscal policy; regulatory capture
JEL Codes: E4; E5; E6; G1; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conflict between central bank (E58) | fiscal authority (O23) |
| scaling down central bank's balance sheet (E52) | reveal quasifiscal activities (H39) |
| reveal quasifiscal activities (H39) | political backlash (D72) |
| cognitive biases among central bankers (E71) | delays in policy reversal (E61) |