Matthew Boesler — Richard Koo: I Can't Find Anyone To Refute My Argument That America Is In A 'QE Trap'

Anyone that understands MMT can. Excess reserves are irrelevant to bank lending, which is driven by demand for loans moderated by loan standards and terms including the rate. When the central bank is paying interest on reserves, the quantity of excess reserves is irrelevant not only to lending capacity but also to policy rate setting. And if the yield curves steepens too quickly in the judgment of the Fed, it can flatten it by announcing the yield it is willing to buy any necessary quantity at, thereby setting a floor on the price of the bond it targets.

The central bank of a currency sovereign that doesn't borrow in a currency it doesn't issue has the operational ability to control its policy rate and yield curve as it chooses.

Actually, Koo provides his own answer.

Koo says one way to avoid the "QE trap" is for the Fed to come out and argue that QE never worked to begin with, thereby downplaying concerns over its withdrawal, but it's unclear whether this would be effective, and he admits that it would be "difficult to implement."

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Richard Koo: I Can't Find Anyone To Refute My Argument That America Is In A 'QE Trap'
Matthew Boesler