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Central Banking in an Era of Quantitative Easing

Andrew Sheng

Economics Working Paper Archive from Levy Economics Institute

Abstract: 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.

Keywords: Bagehot's Rule; Quantitative Easing; Zero Interest Rate Policy; System-Wide Analysis to Central Banking Policies (search for similar items in EconPapers)
JEL-codes: B00 E42 E52 E58 E60 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-hpe, nep-mac, nep-pke, nep-reg and nep-sea
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Citations: View citations in EconPapers (2) Track citations by RSS feed

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