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

2022 ◽  
Vol 0 (0) ◽  
Author(s):  
Gabriel A. Giménez Roche ◽  
Nathalie Janson
Keyword(s):  
Central Banks ◽  
Unintended Consequences ◽  
Asset Markets ◽  
Primary Concern ◽  
Market Maker ◽  
Monetary Policies ◽  
Market Makers ◽  
Structural Problems ◽  
The Difference ◽  
Bank Reserves

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.

scholarly journals ARE THE EFFECTS OF UNCONVENTIONAL MONETARY POLICY ON FINANCIAL MARKETS CAUSING BUBBLES?

2019 ◽  
Vol 1 (1) ◽  
pp. 1-1 ◽  
Author(s):  
Daniel Lacalle
Keyword(s):  
Financial Markets ◽  
Central Banks ◽  
Unintended Consequences ◽  
Quantitative Easing ◽  
Unconventional Monetary Policy ◽  
Monetary Policies ◽  
Policy Makers ◽  
The Past ◽  
Long Run ◽  
Asset Classes

Cheap money can become very expensive in the long run. Unconventional monetary policies have been the main tools of central banks to tackle the economic crisis. In this paper we aim to understand whether these policies have created distortions in the fi nancial markets and if we can be concerned about the creation of “bubbles”, considering whether quantitative easing has impacted fi nancial asset classes’ valuations beyond reasonable fundamentals. I conclude that there is empirical evidence of inordinate expansion of multiples and that central bank policy makers should include “fi nancial market infl ation” as well as consumer price indices (CPI) in their assessment of infl ation expectations. I believe that this should be an essential analysis to avoid unintended consequences in the future, and a possible next fi nancial crisis that central banks will be unable to face with the same tools of the past.

From conventional to unconventional monetary policies: The failure of the market‐maker of last resort

World Economy ◽  
2018 ◽  
Vol 42 (1) ◽  
pp. 296-317 ◽  
Author(s):  
Gabriel A. Giménez Roche ◽  
Nathalie Janson
Keyword(s):  
Market Maker ◽  
Monetary Policies

Interakcje polityki pieniężnej i fiskalnej a niezależność banku centralnego – przegląd możliwych podejść modelowych w badaniach empirycznych

2020 ◽  
Author(s):  
Ryszard Kokoszczyński ◽  
Joanna Mackiewicz-Łyziak
Keyword(s):  
Fiscal Policy ◽  
Price Level ◽  
Empirical Studies ◽  
Central Banks ◽  
Overwhelming Majority ◽  
Monetary Policies ◽  
Sustainable Policy ◽  
Monetary And Fiscal Policy ◽  
Simple Models

There are numerous theoretical and empirical studies on interactions between monetary and fiscal policy. Even if the independence of central banks affects those interactions, it has rarely been directly included in those studies. In this chapter, we present two general approaches to empirical studies on interactions between those two policies and the possibilities for inclusion of independence of central banks in their modelling. Generally, the first approach has poor theoretic background and relies on simple models describing rules for fiscal and monetary policies. Those models also include proxies for some aspects of fiscal policy. Similarly, some simple measures usually address the independence of central banks. The second approach most often roots in the fiscal theory of the price level. The overwhelming majority of presented studies report a significant impact of the central banks’ independence in the form of a more sustainable policy using the first approach.

scholarly journals Comparison of effects of expansionary monetary policy in the Czech Republic and Slovakia

2020 ◽  
Vol 74 ◽  
pp. 04006
Author(s):  
Boris Fisera ◽  
Jana Kotlebova
Keyword(s):  
Monetary Policy ◽  
Czech Republic ◽  
Banking Sector ◽  
Open Economies ◽  
Balance Sheet ◽  
Bank Lending ◽  
Central Banks ◽  
Monetary Policies ◽  
The Czech Republic ◽  
Economic Developments

The ongoing process of globalization has affected the way the monetary policy is conducted – and this is especially the case of small open economies, where the economic developments are heavily affected by the developments abroad. Therefore, the aim of this paper is to investigate the effects of unconventional monetary policy in two very open economies – Slovakia and the Czech Republic in the post-crisis era – the two rather similar very open economies. We assess the effects of their monetary policies by estimating their impact on the banking sector in both countries. We employ two cointegrating estimators – DOLS and FMOLS, so that we can assess the dynamics of the relationship between the developments of main balance sheet items of the respective central banks and the aggregate bank lending to various sectors of the economy. We do find evidence that unconventional policies of both central banks did lift bank lending – with the effect being stronger in Slovakia and for the QE policies. In both countries, the effect was more pronounced for the bank lending to household sector – specifically on housing related loans. Finally, we do not find evidence that the increasing openness of these two already very open economies affected the transmission of monetary policies into the banking sector.

scholarly journals Examining the success of the central banks in inflation targeting countries: the dynamics of the inflation gap and institutional characteristics

2018 ◽  
Vol 22 (1) ◽  
Author(s):  
Omid M. Ardakani ◽  
N. Kundan Kishor
Keyword(s):  
Inflation Targeting ◽  
Panel Data Analysis ◽  
Central Banks ◽  
Institutional Characteristics ◽  
Macroeconomic Performance ◽  
Fiscal Discipline ◽  
Policy Regime ◽  
Conditional Mean ◽  
Inflation Targets ◽  
The Difference

AbstractThis paper analyzes the performance of the central banks in inflation targeting (IT) countries by examining their success in achieving their explicit inflation targets. For this purpose, we decompose the inflation gap, the difference between actual inflation and the inflation target, into predictable and unpredictable components. We argue that the central banks are successful if the predictable component diminishes over time. The predictable component of the inflation gap is measured by the conditional mean of a parsimonious time-varying autoregressive model. Our results find considerable heterogeneity in the success of these IT countries in achieving their targets at the start of this policy regime. Our findings suggest that the central banks of the IT adopting countries started targeting inflation implicitly before becoming an explicit inflation targeter. The panel data analysis suggests that the relative success of these countries in reducing the gap is influenced by their institutional characteristics, particularly fiscal discipline and macroeconomic performance.

scholarly journals Does Evidence Challenge the Dsge Model?

2014 ◽  
Vol 2 (2) ◽  
pp. 15-24
Author(s):  
Tanya Araújo ◽  
Sofia Terlica ◽  
Samuel Eleutério ◽  
Francisco Louçã
Keyword(s):  
Financial Markets ◽  
Historical Data ◽  
Central Banks ◽  
Dsge Model ◽  
Monetary Policies ◽  
Return To Equilibrium ◽  
Basic Assumptions

ABSTRACT DSGE are for a time the favorite models in the simulation of monetary policies at the central banks. Two of its basic assumptions are discussed in this paper: (a) the absence of endogenous nonlinearities and the exogenous nature of shocks and (b) the persistence of or the return to equilibrium after a shock, or the absence of dynamics. Our analysis of complex financial markets, using historical data of S&P500, suggests otherwise that financial regimes endogenously change and that equilibrium is an artifact.

Spain and the European Union

2020 ◽  
Author(s):  
Arantza Gomez Arana
Keyword(s):  
European Union ◽  
Economic History ◽  
Unintended Consequences ◽  
The European Union ◽  
Negative Consequences ◽  
Political Class ◽  
Economic Relations ◽  
Community History ◽  
Structural Problems ◽  
New Community

The development of political and economic relations between Spain and the European Union commenced in 1970 with their first agreement and demonstrated the clear interest on the Spanish side to engage with this new Community. The full membership to the then European Community that took place in 1986, was previously supported by the Spanish political class when the country returned to democracy. In the more than three decades of membership, Spain has become the border of Europe in a key geopolitical part of the continent. It has contributed to the development of several Justice and Home Affairs measures and it has helped to the development of European external relations with other countries. Thirty-four years after joining the Community, history has demonstrated that Europhilia is still more important than any unintended consequences developed with the membership, including the Eurocrisis. Its roots could be found in Spain’s recent political and economic history, where isolationism and impoverishment dominated the country for most of the 20th century and the option of joining the Community was seen as a positive move against their political and economic problems. The membership has provided stability in some Spanish political and economic matters, but has not fully resolved the long-term and structural problems that this Iberian country suffers from. However, throughout this journey, Spain has held to a pro-EU sentiment, even in recent times, while other EU countries suffer from high levels of Euroscepticism. This chapter argues that despite some of the negative consequences of joining the European Union, Spain’s recent history has been too significant to transform its Europhilia into Europhobia.

scholarly journals Behavioral agent-based framework for interacting financial markets

2020 ◽  
Vol 5 (2) ◽  
pp. 94-115
Author(s):  
Heba M. Ezzat
Keyword(s):  
Financial Markets ◽  
Trading Strategy ◽  
Past Performance ◽  
Time Step ◽  
Monetary Policies ◽  
Content Type ◽  
Agent Based ◽  
Market Makers ◽  
Novel Approach ◽  
Excess Volatility

Purpose This paper aims at developing a behavioral agent-based model for interacting financial markets. Additionally, the effect of imposing Tobin taxes on market dynamics is explored. Design/methodology/approach The agent-based approach is followed to capture the highly complex, dynamic nature of financial markets. The model represents the interaction between two different financial markets located in two countries. The artificial markets are populated with heterogeneous, boundedly rational agents. There are two types of agents populating the markets; market makers and traders. Each time step, traders decide on which market to participate in and which trading strategy to follow. Traders can follow technical trading strategy, fundamental trading strategy or abstain from trading. The time-varying weight of each trading strategy depends on the current and past performance of this strategy. However, technical traders are loss-averse, where losses are perceived twice the equivalent gains. Market makers settle asset prices according to the net submitted orders. Findings The proposed framework can replicate important stylized facts observed empirically such as bubbles and crashes, excess volatility, clustered volatility, power-law tails, persistent autocorrelation in absolute returns and fractal structure. Practical implications Artificial models linking micro to macro behavior facilitate exploring the effect of different fiscal and monetary policies. The results of imposing Tobin taxes indicate that a small levy may raise government revenues without causing market distortion or instability. Originality/value This paper proposes a novel approach to explore the effect of loss aversion on the decision-making process in interacting financial markets framework.

ON MARKET MAKER FUNCTIONS

2012 ◽  
Vol 3 (1) ◽  
pp. 61-63 ◽  
Author(s):  
Robin Hanson
Keyword(s):  
Scoring Rules ◽  
Double Auction ◽  
Market Maker ◽  
Main Function ◽  
Market Makers ◽  
Continuous Double Auction

Since market scoring rules have become popular as a form of market maker, it seems worth reviewing just what such mechanisms are intended to do.The main function performed by most market makers is to serve as an intermediary between people who prefer to trade at different times.  Traders who have the same favorite times to trade can show up together to an ordinary continuous double auction, and then make and accept offers to trade.  But when traders have different favorite times, a market maker can help them by first making offers that some of them will accept, and then later making opposite offers which others will accept.  By adjusting prices in his favor, a market maker can even profit from providing this service.

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