Quantitative easing, negative interest rates and money creation. What central banks can and cannot do?

Mariusz Kapuscinski () and Dorota Scibisz ()
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Mariusz Kapuscinski: Warsaw School of Economics, Narodowy Bank Polski
Dorota Scibisz: Warsaw School of Economics

No 26/2016, Working Papers from Institute of Economic Research

Abstract: Since the Great Recession some central banks have introduced measures such as quantitative easing (QE) and negative interest rates which seem unconventional in terms of the pre-crisis monetary policy consensus. Some economists and policymakers expect these actions to affect the money supply, both directly and indirectly. The paper confronts these statements with some institutional constraints on money creation to examine whether the claimed influence on money supply is possible. Some types of QE could affect the money supply, however it should not be perceived as an incentive for commercial banks to increase lending. When it comes to the negative policy rates, the effect on banks’ lending might actually be quite the opposite to the expected growth. These discrepancies result from certain inaccurate beliefs about money creation. Some adjustments provide a more realistic view of possible consequences of unconventional monetary policies and may contribute to the better implementation of monetary policy at the zero-lower bound.

Keywords: quantitative easing; negative interest rates; money creation; monetary transmission (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 (search for similar items in EconPapers)
Date: 2016-05, Revised 2016-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pes:wpaper:2016:no26

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