The roles of central banks in the advanced economies have expanded and multiplied since the beginning of the crisis. The conventional monetary policy roles have been transformed.
The conventional monetary policy roles - setting interest rates in the pursuit of macro-economic stability and acting as lender of last resort and market maker of last resort to provide funding liquidity and market liquidity to illiquid but insolvent counterparties - have both been transformed. With official policy rates near or at the effective lower bound, the size of the central bank's balance sheet and the composition of its assets and liabilities have become the new, 'poor man's', monetary policy instruments.
The LLR and MMLR roles have expanded to include solvency support for SIFIs and, in the euro area, the provision of liquidity support and solvency support for sovereigns also. The central banks have used their balance sheets and their non-inflationary loss-absorption capacities (NILAC) to engage in quasi-fiscal actions that have been essential to prevent even greater financial turmoil and possible disaster, but that also have important distributional impacts between sectors, financial institutions, individuals and nations. The ECB was forced into this illegitimate role by the fiscal vacuum at the heart of the euro area; the Fed by the fiscal paralysis of the US Federal government institutions.
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