From Conventional to Unconventional Monetary Policies: The Consequences of the Market-Maker-of-Last-Resort

Abstract

The increasing importance of commercial banks’ noninterest-earning activities rendered conventional monetary policy relatively obsolete in the contemporary economy. It has been a long time since commercial banking was limited to bank lending activities. Indeed, it is now present in practically all segments of the financial markets. Although this opened new outlets to improve performance, it also exposed commercial banking to greater volatility. In order to meet their stability goals, central banks around the world have now to intervene in all those markets where commercial banking has extended its activities. This effectively changed central banking from having a lender-of-last-resort role to that of a market-maker-of-last-resort. This paper provides a survey of contemporary practices in central banking, and exposes the consequences of so-called unconventional monetary policy to the world economy. The main point here is that the emergence of the market-maker-of-last-resort role actually makes the economy weaker instead of strengthening it.

Keywords: monetary policy, qualitative easing, quantitative easing, unconventional policies

JEL Classification: B53, E43, E44, E51, E52, E58