Central bank put

Monetary policy.

'Central bank put' is an abbreviation for central bank put option.

The concept of the central bank put option is an assumption that central banks will intervene to prevent excessive falls in equity and other market valuations, usually by reducing interest rates.

If this were true, then investors would effectively be protected by the central bank against extreme losses from falls in market prices.

This, in turn, could encourage excessive risk-taking, effectively underwritten by the expectation of central bank support.

This would be effectively granting a free put option to investors.

Such an expectation could act as a form of moral hazard in markets.

The concept was first popularised as the 'Greenspan put' when Alan Greenspan was chair of the US Federal Reserve from 1987 to 2006, and he was considered to be following this policy.

Acid test of central bank put

"The true acid test of the central bank 'put' will come when inflation starts to rear its ugly head."

The Treasurer magazine, Cash Management Edition April 2019 p15, Kallum Pickering, senior economist at Berenberg Bank.

See also

• Acid test
• Call option
• Central bank
• Inflation
• Monetary policy
• Moral hazard
• Option
• Put option