Effectiveness and Addictiveness of Quantitative Easing

Peter Karadi and Anton Nakov

No 14951, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper analyses optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks' capital position. It warns, however, that the policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector and therefore slows down its recapitalization. Consequently, optimal exit from large central bank balance sheets is gradual.

Keywords: Large-scale asset purchases; Balance-sheet-constrained banks (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-mac, nep-mon and nep-ore
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Citations: View citations in EconPapers (4)

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Journal Article: Effectiveness and addictiveness of quantitative easing (2021)
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