Working Paper

Ultra easy monetary policy and the law of unintended consequences

Abstract: In this paper, an attempt is made to evaluate the desirability of ultra easy monetary policy by weighing up the balance of the desirable short run effects and the undesirable longer run effects?the unintended consequences. The conclusion is that there are limits to what central banks can do. One reason for believing this is that monetary stimulus, operating through traditional (\"flow\") channels, might now be less effective in stimulating aggregate demand than previously. Further, cumulative (\"stock\") effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the \"independence\" of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not \"a free lunch,\" governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level.

Keywords: Banks and banking, Central;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2012

Number: 126