Post-crisis central bank unconventional policies and financialised transmission channels

Policy Study

The ECB started €1 trillion worth of massive large scale asset purchase programme (LSAP), known popularly as quantitative easing (QE), when the evidence from the US where LSAP and other unconventional monetary policies have been in operation for the last seven years, shows that the transmission mechanisms have not worked as expected and private investments have not returned to the pre-crisis levels. Unemployment targets have been achieved but there are serious doubts about the quality of jobs created and the accuracy of the measuring the health of labour market- labour participation rate has declined and productivity has not improved. In a financialised economy firms seek shareholder value creation and have used low cost of borrowing in the U.S. to do share buybacks and tend to use high share prices to do acquisitions, neither activity leading to higher investments that would bring long-term economic growth and job creation. Shareholder value-driven banking firms aim to achieve high return on equity while de-risking their balance sheets which means higher risk weighted credit to real economy is not desirable. This paper will first critically question ECB’s hubristic claims on how transmission channels would work under the recently launched LSAP to achieve the goals of higher private investments and job creation.  Then in section two financialised firm behaviour will be explained before arguing, by using relevant data and small case studies, that such firm behaviour, both in non-financial and financial sectors, obstructs transmission channels from delivering the desired economic results and financial stability.  The third section will conclude by underlining why academic and policy debates on unconventional central bank policies need to address financialised firm behaviour.

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