By Paul De Grauwe, Yuemei Ji
Since central banks started their fight against inflation, they have transferred massive amounts of their profits to banks. The authors of this column have suggested that minimum reserve requirements are a valid alternative, but they have met fierce resistance because they are seen as introducing distortions and departures from efficiency. However, the authors argue that successive financial crises have shown there is a trade-off between efficiency and stability. The emphasis of central bankers on using policy tools that do not interfere with market forces comes at the price of less stability and more financial crises.
Link: The extraordinary generosity of central banks towards banks: Some reflections on its origin