For the United States, see: Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack (2011), “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases”, International Journal of Central Banking, 7(1), pp.3–43. BIS central bankers’ speeches  3  though the MPC would be unlikely to initiate such a programme until Bank Rate was high enough that it could be cut to maintain demand if conditions deteriorated. Such a programme of sales could be expected to put upward pressure on yields, though by much less than the purchases pushed down on yields because markets would be functioning more normally. In addition, both heightened risk aversion and regulatory changes mean that banks will want to hold significantly more high-quality liquid assets than in the past; Chart 6 shows these holdings had shrunk to less than 1% of bank assets pre-crisis. That means an additional source of demand for gilts and other highly liquid assets that can be easily sold or repo’d. That should also attenuate the upward pressure on yields from running down the portfolio. In case this all sounds rather sanguine, I should say that I do not expect central banks’ collective management of the exit from the present exceptionally stimulatory monetary stance will be easy. The bumpiness of the incoming data, allied to a state-contingent reaction function, means that market interest rates are bound to become more volatile along the exit path, however well central banks communicate their intentions.
Such a view ran counter to that espoused by many central bankers, most notably Federal Reserve Chairman Alan Greenspan, who questioned the feasibility of addressing such financial imbalances with preemptive monetary policy; in his view, monetary policy should instead focus on minimising the fallout from any subsequent correction – the so-called “cleaning” approach. 4 While the logic of leaning against the wind is sound in principle, the key question is whether a monetary tightening of plausible magnitude is likely to be effective in attenuating an established credit boom. Even if policy rates may appear with hindsight to have been held too low for too long in the years preceding the crisis, particularly in the United States, the empirical evidence suggests that they would need to have been significantly higher to have had a meaningful impact on the rate of credit expansion. 5 It is a brave central banker who would deliberately induce a recession in order to head off the mere risk of a future financial correction. 3  For instance, William White (2006), “Is price stability enough?”, Bank for International Settlements Working Paper 205. 4  Alan Greenspan (2002), “Opening Remarks” in Rethinking Stabilization Policy, Federal Reserve Bank of Kansas. 5  Charles Bean, Matthias Paustian, Adrian Penalver and Tim Taylor (2010), “Monetary Policy after the Fall” in Macroeconomic Challenges: The Decade Ahead, Federal Reserve Bank of Kansas.