Dialogue with the Alter Ego on the dilemma of Quantitative Easing
We believe that the Fed should not shrink its balance sheet all the way back to a size that would have been considered normal prior to the global financial crisis but should instead leave a larger amount of liquidity in the financial system on a permanent basis. (…) by keeping the balance sheet more elevated than otherwise, the Fed would be providing a greater amount of liquidity to the financial system, allowing it to potentially operate with better efficiency and reduced risks. In our view, this proposal would improve the transmission of monetary policy to the overall economy and would provide the Fed with flexibility to respond to future crises with its balance sheet as it sees appropriate. –