The Central Bank Shift to Market Maker of Last Resort: The Unintended Consequences of Unconventional Monetary Policies

Gabriel Giménez Roche and Janson Nathalie ()
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Janson Nathalie: Finance Department, NEOMA Business School, Mont-Saint-Aignan, France

Journal des Economistes et des Etudes Humaines, 2021, vol. 27, issue 1, 1-33

Abstract: We analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets.

Keywords: balance sheet recession; market maker of last resort; qualitative easing; quantitative easing; unconventional monetary policies (search for similar items in EconPapers)
JEL-codes: B53 E43 E44 E51 E52 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/jeeh-2021-0037

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