Here is the one of the most important issues in monetary policy that we will be following this term.
Some background: with the economy weak, the US central bank (FED) introduced several rounds of monetary stimulus. The one in question involves monthly, large scale purchases of long-term bonds, often called QE3 (for the third round of Quantitative Easing). The aim: to increase the price of bonds and reduce long-term interest rates (as we will learn later in the course, there is an inverse relationship between bond prices and interest rates).
These purchases eventually have to stop as they increase liquidity in the economy and will cause inflation. The FED has been talking about the end of QE3 for the last few months.
The article points out the dangers of ending the stimulus. It compares the current situation to that in 1994. Then, as the FED tightened policy, the bond markets crashed around the world. Now the stimulus is much larger than in 1994, and international links are stronger. So the end of the stimulus may lead to a global bond crash.
Solutions proposed by the policymaker mentioned in the article (Joerg Asmussen, a member of the ECB - European Central Bank - board) is clear communication, so that markets are not surprised, and monitoring inflationary expectations.
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