EXIT STRATEGY
How and when do central banks need to unwind the extra monetary stimulus?
Simple answers:
- when the economy rebounds and
- inflationary prospects are back in line with the central bank’s price stability objective.
Not Easy
Unfortunately, for a number of reasons, formulating an adequate exit strategy is not such an easy task. Why?
Two choices that need to be made:
- first, devising the right sequence for the phasing out of the conventional and unconventional monetary policy accommodation;
- second, deciding on the speed at which the unconventional accommodation is removed.
To unwind unconventional monetary policy operations (in the case of quantitative easing and credit easing policies),
- it normally implies selling assets outright, and in significant amounts.
In the case of the endogenous easing measures, the unwinding happens automatically, since banks should naturally
- reduce their demand for central bank money and
- increase interbank lending as their situation normalises.
Reference:
Conventional and unconventional monetary policy
Lorenzo Bini Smaghi,
Member of the Executive Board of the European Central Bank,
Keynote lecture at the International Center for Monetary and Banking Studies (ICMB),
Geneva, 28 April 2009
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