Daily Archives: March 14, 2014

Chris Giles

This is a question to which I have not given a huge amount of thought, since all central banks have declared an intention to unwind QE eventually and have given the impression that any other policy would be disastrously inflationary.

The Bank of England has always had an eventual unwind as part of its declared policy. Normally the logic goes that without selling assets back to the private sector and destroying the money the central bank has created, the price will be a huge credit boom once the recovery is underway. In this world it’s best to get back to a more normal level of base money in the system to prevent the money supply growing out of control.

This logic is challenged by the BoE’s quarterly bulletin article on money creation in a modern economy. The article attacks those who think QE is automatically inflationary because it will lead to a ballooning supply of money chasing too few goods. Wrong, says the bank. Commercial banks lend because there is demand from households and companies, not because they have base money burning a hole in their pocket. And furthermore, the BoE adds, it can always control the demand for loans with monetary policy.

But if QE never can create inflation, the article raises a bigger question, which it fails to answer. Why bother to unwind QE? Read more

Chris Giles

In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.

First, he clearly defines the term:

“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”

Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles. Read more