As it is, the system has become “really dependent” on the US central bank to be the saviour instead of it serving as a last resort.
While interventions by the US Federal Reserve provide much-needed liquidity support during times of crisis, which help asset prices recover more quickly, avoid deflation and softening the economic fallout, these could cause problems in the longer run, warns Professor Raghuram Rajan of the University of Chicago Booth School of Business.
Speaking at the joint dinner for the Asian Bureau of Finance and Economic Research (ABFER) and the 12th Asian Monetary Policy Forum (AMPF) on May 22, Rajan cited a 2023 paper by Ferguson, et al., which found that such interventions, while effective in the short term, may create a higher probability of further crises happening in the next 20 years. The more accommodative the stance of the central bank, there is a higher probability of a financial crisis taking place next, he adds.
