The macroprudential role of central bank balance sheets

Egemen Eren, Timothy Jackson and Giovanni Lombardo

No 1173, BIS Working Papers from Bank for International Settlements

Abstract: Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets.

Keywords: optimal monetary policy; central bank balance sheet; government debt; reserves; financial frictions; macroprudential (search for similar items in EconPapers)
JEL-codes: E42 E44 E51 E52 G2 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-dge and nep-mon
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