Monetary policy in the US and EU after quantitative easing

Written on August 26th, 2014 in politics Comments Off

… Monetary policy in the US and EU after quantitative easing, the case for asset based reserve requirements ABRR – Published on Real World Economics Review, issue no 68, by Thomas I. Palley, Aug 21, 2014.

  • Abstract: This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That is equivalent to giving banks a tax cut at the public’s expense. It also risks domestic and international financial market turmoil. The paper proposes an alternative exit strategy based on ABRR which avoids the adverse fiscal and financial market impacts of higher interest rates. ABRR also increase the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage and can shrink a financial sector that is too large.
  • Keywords: Quantitative easing, asset based reserve requirements, exit strategy
  • JEL reference E52, E58

1. Introduction:

This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That strategy is equivalent to giving banks a tax cut at the public’s expense, and it also risks domestic and international financial market turmoil. The paper offers an alternative exit strategy based on asset based reserve requirements (ABRR) which avoids the adverse fiscal and financial market impacts of higher interest rates. Implementing a system of ABRR also increases the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage, and they can also help shrink the financial sector which many believe has become too large owing to financialization of the economy … //

… 8. Conclusion: the question of policy authority:

This paper has argued that ABRR provide a superior exit strategy from QE compared to the Federal Reserve’s current proposed strategy of paying interest on reserves. Not only would an ABRR based exit strategy be cheaper and more effective, it would also yield significant improvements in the conduct of monetary policy by giving the Federal Reserve new policy instruments to target specific financial sector disruptions. An ABRR strategy would also yield similar benefits to the ECB and the euro zone. The Federal Reserve already has the legal authority to impose ABRR on commercial banks. If it needs new legal authority to enable it to impose ABRR beyond the banking sector, it should seek that authority from legislators. Lack of authority is not an argument against ABRR: instead, it is an argument for new legislation granting authority.

(full text and references).

Related Links:

  • download issue no 68 of the real-world economics review RWER; August 21, 2014;
  • it’s blog;
  • the nonsense about France, on RWER blog, Aug 24, 2014;
  • Quantitative Easing QE on en.wikipedia is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.[1][2][3] A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.[4][5] This is distinguished from the more usual policy of buying or selling short-term government bonds in order to keep interbank interest rates at a specified target value[6][7][8][9] …;

Other Links:

Police Response in Ferguson Rooted in Systemic Violence and Militarism, on Dissident Voice, by Brian J. Trautman, August 24, 2014;

And They Say I’m the Crazy One, on Dissident Voice, by Phillip Faruggio, August 24, 2014;

Volodymyr Ishchenko on Kiev’s attempts to ban the Communist Party: its meaning for democracy and the left, on LINKS, by Volodymyr Ishchenko, Aug 4, 2014;

Book: The Failure of Nonviolence: From the Arab Spring to Occupy, by Peter Gelderloos, 306 pages: on Left Bank Books; on amazon: … The last ten years have revealed more clearly than ever the role of nonviolence. Propped up by the media, funded by the government, and managed by NGOs, nonviolent campaigns around the world have helped oppressive regimes change their masks, and have helped police to limit the growth of rebellious social movements. Increasingly losing the debates within the movements themselves, proponents of nonviolence have increasingly turned to the mainstream media and to government and institutional funding to drown out critical voices …;

… and this:

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