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Perils of unconventional monetary policy

Michael McMahon (), M. Udara Peiris and Herakles Polemarchakis

Journal of Economic Dynamics and Control, 2018, vol. 93, issue C, 92-114

Abstract: Unconventional monetary policy, by relaxing restrictions on the composition of the balance sheet of the central bank, compromises control over the stochastic path of inflation; or, in open economies, over the stochastic path of exchange rates. If the composition of the balance sheet is unrestricted then the path of inflation is indeterminate. This is the case under pure quantitative easing, where the target is the size of real money balances. In contrast, credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought, and thus can implement a determinate path of inflation. The composition of the portfolios traded by monetary-fiscal authorities also determines premia in asset and currency markets.

Keywords: Unconventional monetary policy; Stochastic path of inflation (search for similar items in EconPapers)
JEL-codes: D50 E31 E52 (search for similar items in EconPapers)
Date: 2018
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