Professor of Economics - London Business School
Non-Standard Monetary Policy And Financial Stability
Developing An Appropriate Macro-Financial Policy Mix
Reichlin, L., Pill, H.
Date Published: November 2016
What are the potential risks of central bank balance sheet policies for financial stability? The answer to this question depends on the type of balance sheet policies and on the type of financial stability risk. Allowing central bank intermediation to substitute for private intermediation when markets seize up tends to bolster financial stability. Such interventions can be characterised as ‘circuit breakers’ that halt a potentially vicious downward spiral of market dislocation and loss of market participants’ confidence. By contrast, central bank asset purchases aimed at reducing returns on safe assets and pushing private investors further along the risk and maturity spectra than they would otherwise choose to go may serve to generate financial stability risks. This is the case if the primary concern for stability is the squeeze on banks' profitability generated by a flat yield curve. On the other hand a flat curve decreases the incentive for financial institutions to engage in maturity transformation thereby decreasing a different source of financial stability concerns. Banks as a consequence become safer but less profitable.
Reichlin, L., Pill, H. Non-Standard Monetary Policy And Financial Stability - Developing An Appropriate Macro-Financial Policy Mix, November 2016
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