A Monetary Analysis of Balance Sheet Policies

Markus Hoermann and Andreas Schabert

No 68, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: We augment a standard macroeconomic model to analyze the effects and limitations of balance sheet policies. We show that the central bank can stimulate real activity by changing the size or the composition of its balance sheet, when interest rate policy is ineffective. Specifically, the central bank can stabilize the economy by increasing money supply against eligible assets even when the policy rate is at the zero lower bound. By changing the composition of its balance sheet, it can affect interest rates and, for example, neutralize increases in firms' borrowing costs, which is not possible under a single instrument regime. We further analyze the limitations of balance sheet policies and show that they are particularly useful under liquidity demand shocks.

Keywords: Unconventional monetary policy; collateralized lending; quantitative easing; liquidity premium; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Date: 2013-12-29
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 (4)

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Journal Article: A Monetary Analysis of Balance Sheet Policies (2015)
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