The central bank should be sector-agnostic

Large Scale Asset Purchases (LSAPs) of mortgage-backed securities have been a major component of recent monetary policy. It is not without critics as this is a policy that has been targeted towards a specific sector of the economy, the real estate sector. This is principle a big no-no, as a central bank should only care about the overall economy, not specific sectors or firms. In a similar fashion, the ECB has been criticized for buying out specific countries following conditions that were differentiated by country, instead of applying one rule to all, or even not buying country debt at all. But if all sectors benefit equally or if that was the most efficient way to conduct policy, that is all good.

In the case of LSAPs, Meixing Dai, Frédéric Dufourt and Qiao Zhang find it was certainly not the most efficient way to deal with a confidence shocks in the banking sector, and it obviously privileged the real estate industry. One could have done better by buying corporate bonds, but in a uniform manner across sectors. This works better than mortgage-backed securities because they are less leveraged and thus free up more bank capital. This is more true if financial markets are more segmented, that is, if bankers cannot freely reallocate resources between sectors. What the paper does not say is how this would have compared to a conventional policy, buying government bonds.