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

Abstract

This paper analyses the new role of market-maker of last resort openly assumed by central banks since the 2008 financial crisis revealed the increasing impact of noninterest-income activities on banks' balance sheets. A brief review of the distinction between conventional and unconventional monetary policies shows that the inflexion point from lender of last resort to market-maker of last resort is given by the extension of central bank intervention to other markets than the bank reserves markets. Herein, it is explained how the market-maker of last resort role is as counterproductive as its predecessor in putting the economy back on track. We show that the main problem of both conventional and unconventional monetary policies is that they distort price signals, particularly asset prices, in their attempt to reignite economic growth. Instead of correcting cyclical fluctuations, the policies of the market-maker of last resort prevent the cyclical divergences between financial and goods sectors from readjusting.