Reversing Unconventional Monetary Policy: Technical and Political Considerations

32 Pages Posted: 11 Jan 2010

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Date Written: December 2009

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 Classification: E4, E5, E6, G1, H6

Suggested Citation

Buiter, Willem H., Reversing Unconventional Monetary Policy: Technical and Political Considerations (December 2009). CEPR Discussion Paper No. DP7605. Available at SSRN: https://ssrn.com/abstract=1533210

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
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New York, NY 10013
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+12128162363 (Phone)
+12128168970 (Fax)

HOME PAGE: http://willembuiter.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

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New York, NY
United States

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