Specifically, asset purchases are sometimes seen as “quasi fiscal policies” both on the asset side (due to the potential risks attached) and the liability side (when they contribute significantly to meeting the funding needs of the sovereigns). BIS central bankers’ speeches  1  At the time they were decided, those exceptional interventions were absolutely necessary. Although it had been forgotten, central banks were initially created to protect the economy from excessive financial disturbances. This was, historically, their “raison d’être”. As ultimate and unique providers of liquidity, they cannot escape this responsibility and let the financial system and the economy collapse. At the same time, by doing so, central banks have exposed themselves to a number of risks First, there are risks linked to balance sheet expansion. They cannot be ignored, although all central banks have been extremely careful in valuing the assets purchased or taken as collateral. Second, they run the risk of blurring the lines between fiscal and monetary responsibilities. A dynamic use of their balance sheets by central banks has effects on the allocation and distribution of resources in the economy. They may favour or penalise some types of collateral or certain borrowers. If central banks take on additional responsibilities in the area of financial stability, they will have to do so in close cooperation with fiscal authorities, thus exposing themselves to possible interferences with monetary policy. The major risk, however, is the risk of confusion. A multiplicity of interventions could be interpreted as a relative dilution of objectives.

There was a happy feeling that, at last, a perennial monetary regime had been found, well-tailored to the characteristics of a modern market economy. Financial markets were efficient and the zero lower bound and liquidity trap appeared to be no more than historical curiosities. With hindsight, of course, we can see now that this “ideal” economy may never have existed. The Great Moderation was as much a product of “good luck” (brought by disinflationary effects of globalisation) than good policy. Monetary stability is a necessary but not a sufficient condition of financial stability, because capital markets are not always and necessarily efficient. And downward financial spirals may quickly bring our economies to the point where interest rates can no longer be used as effective tools. Therefore, as the crisis unfolded, central banks responded by taking unprecedented measures and, in the process, underwent three major changes A diversification of their interventions. In order to both: Unclog financial markets (both private and public). This involved exceptional liquidity provision to banks as well as temporary purchases of assets, both private and public. Circumvent the zero lower bound and bring down real long-term interest rates through purchases of government bonds, and/ or interest rate guidance. As a consequence, central banks’ balance sheets expanded by a factor of three, dramatically increasing their role in financial intermediation and sometimes raising concerns, at least in some quarters, about the possible inflationary impactTogether, this diversification and the increase in size have created more complex interactions with fiscal policies.