In the news: A few days ago, Canadian Mark Carney became the new governor of the Bank of England. He is known for his stance in favor of fairly accommodative monetary policies. Could we soon see new unconventional monetary policies in the United Kingdom?
We have already had the opportunity to revisit the concept of « unconventional monetary policies, » which differ from « conventional » monetary policy in terms of how they are implemented (the usual channel of « short-term interest rate control –> inflation control » is no longer used here).
The concept of « ULTRA unconventional monetary policy » is used by Patrick Artus in Natixis Flash No. 490. For Artus, excessive debt is the main reason for the lack of growth in OECD countries. One solution to this problem would therefore be for central banks to « destroy debt » by buying it up and reducing it. This is what Patrick Artus calls an « ultra-unconventional » monetary policy.
How would this be implemented? The chief economist at Natixis (Flasheco No. 490) cites two possible methods:
– canceling part of the debt purchased by the central bank
– lowering interest rates on debt purchased by the central bank
However, in both cases, the central bank would then incur a loss on its capital (or lower profits in the second case), and would therefore not distribute any dividends to the government (or lower dividends in the second case) during the period of rebuilding its initial capital level (assuming it was optimal). The government’s implicit debt would therefore remain the same…
For this to have an effect, economic actors would therefore have to ignore this argument and focus on the « nominal » debt (is this not the case?). Unless the impact on deficits (which fall in both cases given the lower debt service) is a sufficiently important factor for the revival of growth.
Julien P.
References
Patrick Artus (2012) « Conventional and unconventional monetary policies are unusable or ineffective; only radically unconventional monetary policies remain, » Flasheco Natixis No. 490
