The macroeconomic effects of reducing a central bank monetary policy portfolio: a model-based evaluation

Anna Bartocci (), Alessandro Notarpietro and Massimiliano Pisani
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Anna Bartocci: Bank of Italy

No 1472, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We use a New Keynesian model with financial market segmentation, calibrated to the euro area, to analyze the macroeconomic effects of a reduction in the stock of long-term sovereign bonds held by a central bank, as the latter does not reinvest the principal payments from maturing bonds. In the model, this reduction affects real and financial variables because a preferred habitat assumption holds for some investors. According to our results, the reduction, by inducing a rise in long-term interest rates, has recessionary and disinflationary effects. These effects are amplified if the central bank does not adequately reduce the policy rate, or if financial markets overreact in the short run to the announcement of the monetary policy portfolio reduction.

Keywords: dynamic general equilibrium model; monetary policy; euro area; central bank balance sheet; non-standard monetary policy measures (search for similar items in EconPapers)
JEL-codes: E31 E32 E58 (search for similar items in EconPapers)
Date: 2024-12
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