How Can a Central Bank Exit Quantitative Easing Without Rapidly Shrinking its Balance Sheet?

Atsushi Tanaka ()
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Atsushi Tanaka: School of Economics, Kwansei Gakuin University

No 196, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: This study constructs a simple dynamic optimization model of a central bank and examines its optimal behavior after exiting quantitative easing using interest-bearing liabilities instead of selling assets and rapidly shrinking its balance sheet. With high interest payments on liabilities, the bank may be forced to expand the monetary base to maintain its solvency, which leads to higher inflation. The model shows when the bank faces such a situation and derives the optimal paths of the monetary base supply and liabilities to deal with this. The study applies the model to the Bank of Japan and examines how the bank can exit quantitative easing.

Keywords: central bank; monetary base; inflation; quantitative easing; exit strategy; solvency. (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2019-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:196

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