decided to purchase mortgage-backed securities (MBSs) to the amount of USD 40 billion every month.

This programme, known as quantitative easing three (QE3), will be executed indefinitely until the unemployment rate goes down to a more acceptable level.

This decision was made only a few days after Mario Draghi, the President of the European Central Bank (ECB), announced his version of monetary easing, or what he called outright monetary transactions. It took the form of a programme to purchase sovereign bonds of euro zone countries in the secondary market with fewer conditionalities. There is now no requirement for triple-A-rated bank collateral and the bonds are not treated as senior loans, meaning that in the event of bankruptcy the ECB loan does not get priority for repayment. However, countries have to subscribe to a bailout programme with tough fiscal and structural reform conditions — as in the case of Greece, Ireland and Portugal. Following this, the Bank of Japan (BoJ) too implemented its brand of QE by buying assets held by banks and providing loans to them of about USD 127 billion.

In all these policies, the central banks seem to demonstrate to the public that they are proactively pursuing a policy to salvage their respective economies. In a way the policy has been decided unilaterally by these independent central banks, without being pressured by the respective governments.

There is no clear answer as to whether these policies work. Most economists who support QE3 could only claim that it is due to these actions that the respective countries’ financial sector, as well as the global financial system, have not worsened. Indeed, every time the policy is announced the market has responded positively, though only for a short while before doubts return. Only market players seem to welcome the moves of these monetary authorities, and, even so, such positive responses last only briefly.

After initial euphoria, market players resume worrying about the longer-term problems, like whether the sovereigns can repay their debts, when growth resumes, and when the unemployment problem will disappear. In other words, there is scepticism about the long-term impact of these monetary policies and whether they are effective at addressing the problem of unemployment.

Mario Draghi stated very clearly that outright monetary transactions cannot be effective without cooperation from the real sector. Monetary policy alone is not enough to have an impact on the real sector; and, basically, it is no substitute for fiscal policy. The problem lies in weak demand coupled with a fragile financial system. There is also the issue of whether a monetary authority has a clear mandate to address the problem of unemployment that quantitative easing is clearly meant to tackle. In a way, QE seems like quasi-fiscal policy, which may not be within the mandate of a central bank.

For sure, the US Federal Reserve System’s mandate does include the objective of achieving full employment in the US economy. But this is not clearly the case with the ECB, whose main function is to maintain stability against inflation and deflation. Most central banks in Asia following the Asian financial crisis of 1997–98 have also become independent with a narrower mandate of merely guarding financial and economic stability.

Another issue involves the ballooning of the balance sheet of these central banks and its implication. In the last four years with QE 1 and 2, the Fed’s balance sheet increased by more than USD 2 trillion. There is now the serious possibility of a sovereign default from the Greek crisis. But if ECB loans to banks are not treated as senior loans, there is a grave possibility of a central bank default.

A more serious impact many economists worry about is on price stability or inflation. It does not take a hard-core monetarist to believe that too much liquidity would ultimately result in inflationary pressure. The Japanese economy in the 1980s and the US economy in the 1990s had demonstrated that too much liquidity and prolonged very low interest rates could result in bubbles — properties or stocks which ultimately developed into financial crises.

The worry about the impact of this strategy on inflationary pressures is just as valid as concerns over the quantitative easing executed by the Fed, ECB and BoJ.

For emerging economies in Asia there is still another concern that cannot be ignored. Money is fungible, as students of monetary economics would say. The additional liquidities arising from the QE3 initiatives of these central banks would not necessarily be spent in their own economies. Any extra liquidity obtained by the households, firms or banks would be used first to clear their outstanding obligations and to improve their balance sheets (deleveraging) before they think about spending, which would then create additional demand, boosting growth and ultimately employment.

But where would these additional funds go? They will flow to where there is more room for profit, and the emerging economies are the most likely target. In a globalised financial system, it is the emerging economies that would have to deal with these additional liquidities looking for room to unload. This means additional challenge for the monetary authorities of the emerging economies of Asia, which are already currently facing increasing risks in general.

J. Soedradjad Djiwandono is Professor in the International Political Economy Programme, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. He is also Emeritus Professor of Economics, University of Indonesia, and former Governor of Bank Indonesia.