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Monetary Policy and Central Bank Balance Sheet Concerns

Tiago Berriel () and Saroj Bhattarai

The B.E. Journal of Macroeconomics, 2009, vol. 9, issue 1, 1-33

Abstract: We introduce a fiscally independent central bank with balance sheet concerns in the new Keynesian model. The central bank is subject to a budget constraint and state-contingent transfers from the treasury are not allowed. This change renders the standard optimal monetary policy solution non implementable. In addition to facing a budget constraint, when the central bank targets real capital, optimal monetary policy is substantially different from the standard case. In response to a cost-push shock, variation in inflation decreases at the cost of increased output gap variation; there is incomplete stabilization of aggregate demand and money demand shocks; response to a cost-push shock under discretion is similar to that under commitment in the standard model; and the central bank tracks real money balances.

Date: 2009
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DOI: 10.2202/1935-1690.1770

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