New Perspectives on Quantitative Easing and Central Bank Capital Policies

Tobias Adrian, Christopher Erceg, Marcin Kolasa, Jesper Lindé, Roger McLeod, Romain Veyrune and Pawel Zabczyk

No 2024/103, IMF Working Papers from International Monetary Fund

Abstract: Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. In this paper, we reconsider the conditions under which QE may be warranted considering the recent high inflation experience. We emphasize that the merits of QE should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. We then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. In short, we suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence.

Keywords: Monetary policy; quantitative easing; central bank remittances; forward guidance; central bank Capital Policies; upside inflation risk; central bank profit; central bank remittance; profits to the government; Unconventional monetary policies; Central bank policy rate; Financial statements; Inflation; Fiscal stance; Global (search for similar items in EconPapers)
Pages: 27
Date: 2024-05-17
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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