Balance sheet policies and Central Bank losses in a HANK model

C. Labrousse and Y. Perdereau
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C. Labrousse: Insee, Paris School of Economics
Y. Perdereau: Paris School of Economics

Documents de Travail de l'Insee - INSEE Working Papers from Institut National de la Statistique et des Etudes Economiques

Abstract: What are the effects of central bank balance sheet expansion, and should we worry about central bank losses? Using a Heterogeneous Agent New Keynesian model incorporating money in utility and an endogenous zero lower bound (ZLB), we study the fiscal-monetary interaction of central bank balance sheet policies. We find that the overall efficiency of asset purchase programmes depends on the combination of the expected future size of the balance sheet and the fiscal transmission of central bank losses. First, permanent balance sheet expansions stimulate the economy in the long-run and, by anticipation, increase inflation and output during the ZLB episode, as they interact with distortionary taxes and imperfect capital markets. Second, at the end of the ZLB, the central bank incurs losses: issuing securities to offset these losses is more welfare-enhancing than raising taxes.

Keywords: monetary policy heterogeneous agents; balance sheet; Quantitative Easing; Quantitative Tightening; Central Bank losses; fiscal and monetary policy mix (search for similar items in EconPapers)
JEL-codes: E21 E41 E51 E52 E58 E63 E65 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-acc, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:nse:doctra:2025-10

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