Unconventional Market Policy: Exit Strategy (8)

Special Operations

Overall, special operations other than the traditional repurchase agreements might be needed to sterilise the effects of unconventional policy measures at the appropriate time in the future. 

1.  One option would be to have the fiscal authority issue debt certificates to the market and deposit the proceeds with the central bank. 

• The switch in the ownership of government debt from the private sector to the monetary authority would alleviate the inflationary pressures arising from the additional liquidity. 

2.  Another option would be for the central bank to issue debt certificates itself, as the ECB for example can do according to its Statute. 

• In this way the central bank would essentially change the composition of the liabilities side of its balance sheet, moving away from excess reserves and towards less-liquid debt securities. 
• The effect, compared with government debt issuance, would in essence be the same.

Financial loss for the central bank

An important final element related to the exit strategy, but which should be considered carefully already when deciding to embark on unconventional measures, is that when the central bank sells the assets their value is likely to have declined considerably, given the higher rate of interest. 

This implies a financial loss for the central bank. 

The consequences for the financial – and overall – independence of the central bank should not be downplayed.