Experts

The great expansion of central banks – what's next?

While one of the primary objectives of central banks is price stability, they have engaged in recent years in the most innovative financial experiment of all times, of both expanding and altering the risk profile of their balance sheets.

Date: Feb 29, 2012          Author: Paul Marson

Keywords: Central banks, Risk profile, Debt

While one of the primary objectives of central banks is price stability, they have engaged in recent years in the most innovative financial experiment of all times, of both expanding and altering the risk profile of their balance sheets.

We know that these so-called quantitative and credit-easing operations work in the short term to lift the prices of financial assets, whose inelastic supply curves make them very reactive to liquidity boosts. But what about the real economy?

Ballooning and riskier central bank balance-sheets will not generate sustainable growth or reduce unemployment and debt levels, but could well induce at a later stage unintended consequences that include bouts of hyper-inflation, loss of trust in fiat money, and loss of central banks’ credibility as to their capacity to maintain strong currencies and stable prices.

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