For example, the recent decision of the Federal Open Market Committee (FOMC) to maintain the pace of its large-scale asset purchases in the face of a generally improving labor market outlook and a widespread perception within financial markets, right or wrong, that the Fed had telegraphed a dialing back of the rate of purchases may have increased uncertainty about the future path of monetary policy. That was one argument raised against the decision not to taper. I know, because I made the argument, and I was not alone. 1  Uncertainty indexes are described and analyzed in the following recent papers: “Measuring Economic Policy Uncertainty,” by Scott R. Baker, Nicholas Bloom and Steven J. Davis, unpublished manuscript, 2013; “Surprise and Uncertainty Indexes: Real-Time Aggregation of Real-Activity Macro Surprises,” by Chiara Scotti, unpublished manuscript, 2013; “Fiscal Volatility Shocks and Economic Activity,” by Jesús FernándezVillaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramírez, unpublished manuscript, 2012; “Risk Shocks,” by Lawrence Christiano, Roberto Motto and Massimo Rostagno, National Bureau of Economic Research, NBER Working Paper no. 18682, January 2013; and “Uncertainty Shocks Are Aggregate Demand Shocks,” by Sylvain Leduc and Zheng Liu, Federal Reserve Bank of San Francisco Working Paper no. 2012-10, January 2013. 2  See “The Leverage Cycle,” by John Geanakoplos, in NBER Macroeconomics Annual 2009, vol. 24, Daron Acemoglu, Kenneth Rogoff and Michael Woodford, eds., Chicago: University of Chicago Press, 2010, pp. 1–65. See, also, “Reviewing the Leverage Cycle,” by Ana Fostel and John Geanakoplos, Yale University, Cowles Foundation Discussion Paper no. 1918, September 2013.

As someone who has argued in the past – often in the face of considerable scepticism – for the importance of monetary and credit mechanisms in monetary policy transmission,18 I find these channels both plausible and potentially important, even if the evidence on their empirical impact is mixed, perhaps reflecting the state contingency of both the signalling and portfolio balance channels. Central banks should certainly be wary of suggesting that their armoury is exhausted when policy rates reach their effective lower bound. Such a view both risks creating deflationary dynamics through a self‐fulfilling prophecy and denies the ultimately monetary origins of price level developments. Asset purchases as a complement to changing Bank Rate Second, central bank asset purchases (and other market interventions) can be understood as efforts to maintain  Bank of England  Page 10  the conventional interest rate channel of monetary policy transmission. By their nature, such efforts are complements to, rather than substitutes for, changes in Bank Rate. To maintain monetary transmission through conventional channels at times of market stress, central banks may need support to the private sector, so as to maintain the functioning of financial markets, institutions, and infrastructures. This has a long history: dealing with ‘banking panics’ towards the end of the nineteenth century was an important motivation for the creation of the Federal Reserve, for example; and the famous Bagehot Rule governing the provision of liquidity support to the banking system has been an important guide for central bank policy for more than a century.