Abstract

We analyze the transition of central banks from lenders to market makers of last resort. The adoption of unconventional monetary policies characterizes this transition. In their new role as market makers, central banks engage in the latter by extending and reinforcing interventions in other markets than the traditional bank reserves market. We then explain that the difference between the two roles is one of degree rather than kind. In both cases, the prevention of liquidity shortages is a primary concern. As conventional policies become inadequate, central banks resort to unconventional policies to escape a general liquidity shortage at the zero lower bound. However, these unconventional policies do not solve the structural problems in financial and real markets. Both conventional and unconventional monetary policies cause price distortions, in particular on asset markets. The policies of the market maker of last resort prevent necessary readjustments of cyclical divergences between real and financial markets.