Unconventional Monetary Policy: Exit Strategy (4)

Unwinding of 'Credit Easing' Policies (Unwinding the Purchase of Corporate Bonds)

Measures taken through the purchase of corporate bonds aim to revitalise the flow of credit in certain market segments.

These measures are primarily designed to bypass the financial sector and to ensure that non-financial corporations still have access to external financing. 

Now, in theory, by stimulating longer-term investments and hence aggregate demand, these measures might induce inflationary pressures in the medium to long-term, independent of the functioning of money markets and lending by banks. 

The strength of this channel depends on the depth of the corporate bond market. 

• If policy-makers were to react to these inflationary pressures by raising interest rates pre-emptively while money markets were still weak, the consequences for the banking channel of intermediation could be severe. 
• If, however, markets were to function properly again, there would be no reason to postpone the unwinding of ‘credit easing’ policies to a date longer than needed. 

Taken together, this reasoning suggests that purchases of privately issued securities should be unwound before or at the same time as interest rates are raised back to normal levels.