Integrating balance sheet policy into monetary policy conditions

Benoit Mojon, Phurichai Rungcharoenkitkul and Dora Xia

No 1281, BIS Working Papers from Bank for International Settlements

Abstract: This paper introduces a new Monetary Policy Condition Index (MCI) that integrates conventional and unconventional monetary policy tools into a unified measure. The MCI is a weighted average of short-term interest rate and central bank balance sheet size, improving upon the shadow rate by capturing balance sheet policy effects away from the effective lower bound. We estimate the MCI's weight and its dynamic relationships with output, inflation and financial conditions using a Bayesian Vector Autoregression (BVAR) framework. Results suggest that large balance sheet policies have exerted a significant accommodative influence on monetary policy conditions, including away from the effective lower bound. Through historical decomposition and counterfactual exercises, the MCI provides new insights into unconventional policy's effectiveness and unintended consequences. The framework can flexibly accommodate numerous extensions, including possibly higher neutral balance sheet under ample reserve system.

Keywords: monetary policy; monetary policy conditions; financial conditions; unconventional monetary policy; central bank balance sheet; ample reserves system (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-acc, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1281

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