Another way of thinking about it is that, at an aggregate level, our purchases reduce the scale of assets that the private sector needs to finance by borrowing from the banks. This is not just a UK thing. That being so, we should not be too surprised that there has been a sharp fall in the utilisation of central banks’ liquidity facilities during 2009. The size of central bank balance sheets (Chart 12) remains much the same as about a year ago, just as QE was getting underway; but the composition of our asset portfolios has changed. The bottom line is that we are still providing an enormous amount of liquidity to the banking system as a whole, but with revived wholesale money markets distributing that assistance to where it is needed. So our monetary instruments and financial stability instruments shade into one another – unsurprisingly. And that means that when planning our so-called exit strategies from monetary easing, central bankers will need to weigh the effects on bank funding conditions, which in turn affect credit conditions and demand in the economy. Five issues for the policy framework for maintaining macro economic stability I want to look beyond the immediate conjuncture. I don’t plan to say anything today about financial sector reform, but will concentrate on the overall framework for preserving macroeconomic stability. That there are lessons from the crisis is obvious. Don’t be seduced by the appearance of stability The so-called Great Stability was, with hindsight, in some respects a surface phenomenon.
This country suffered too much from the inflationary booms and busts of the past for us to take risks on that score – in either direction. QE: the stimulus to nominal demand, and the financing of the banking system To avoid the downside risks, we need to help to revive the economy. And the monetary stimulus is, of course, directed at a big deficiency of nominal demand in the economy. At our latest monthly meeting in early February, the MPC maintained Bank Rate at 0.5% and the stock of money injected via asset purchases at £ The money market yield curve has edged down slightly since then. Over the past year my colleagues on the MPC have variously set out the key mechanisms through which Quantitative Easing (QE) should work. I shall not go over all that ground today, but there is unavoidable uncertainty about the speed and potency of QE’s effects. I am minded to think that some of the effects will come through fairly gradually. And therefore I would stress that the monetary stimulus from QE has not stopped. The flow effect of our bond purchases on gilt yields is not the beginning and end of how QE provides monetary  4  BIS Review 21/2010  stimulus. Plainly the mechanisms through which our money injections affect the economy differ in some respects from the transmission of changes in Bank Rate, which in an economy with a lot of (net) floating-rate debt can affect household and business borrowers’ cash flows quickly.