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How should central banks buy bonds?

Written by Professor Jagjit Chadha Wednesday, 10 October 2012 08:40
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The ECB is planning to undertake a form of bond yield stabilisation for peripheral countries with a new tool, Outright Monetary Transactions, to deal with the on-going Sovereign Debt Crisis in the Euro Area. 

 

Many people are treating this as another example of non-conventional monetary policies that will use central bank money to affect asset prices and at first glance it seems so as well. 

 

But after some reflection, OMTs seem me to be a little more, and I hesitate to use the word, insidious and takes us right back to classic debates about whether monetary policy should prick bubbles and/or identify them. 

 

The answer used to be no.  What mattered was the shock or structure that might have led to any mispricing and to try and deal with that by market reform or some examination of the implications of the shock for macroeconomic stability: central banks, so the argument ran, do not generally think they have more information than the market and so ought to concentrate on the cause of mispricing rather than attempt a direct correction - cause rather than symptom was the proper concern.

 

To read the whole article, click here

 

Jagjit S. Chadha is a Professor of Economics at the University of Kent. 

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