It can therefore never be completely excluded that a central bank reaches the technical limits of its ability, to re absorb the liquidity overhang. In these circumstances it may be essential for a central bank to be bestowed with the right of issuing paper for its own account. The Bundesbank 18 given this right since the last change in its Act. In spite of the limitation to this right in volume terms we have fortunately not been exposed to insurmountable difficulties so far but the risks are real. Another uncomfortable aspect of liquidity creation as a consequence of the fiscal agent function is related to the following phenomenon.
Central banks conduct their monetary policy through the money market.
The interest rates in this market provide valuable orientations to a central bank. The creation of extra liquidity as a result of the agent function tends to dilute the reliability of market interest rates as indicators for monetary policy. It has to be taken into consideration also, that through money market operations a central bank can determine the liquidity situation of the national banking system. If as a consequence of the fiscal agent function effects result not only for banks but also for non-banks the central bank will not normally be able to directly influence the more widely defined liquidity aggregates. This is a particularly worrisome aspect of liquidity creation by a central bank as a consequence of the agent function.