A SUNSPOT-BASED THEORY OF UNCONVENTIONAL MONETARY POLICY

Roger Farmer and Pawel Zabczyk

Macroeconomic Dynamics, 2022, vol. 26, issue 1, 186-217

Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:26:y:2022:i:1:p:186-217_7

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