Funding Quantitative Easing to Target Inflation

Ricardo Reis

No 11505, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an effect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank's interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.

Keywords: Large scale asset purchases; Event studies; Monetary policy; Monetarism (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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Related works:
Working Paper: Funding Quantitative Easing to Target Inflation (2016)
Working Paper: Funding quantitative easing to target inflation (2016)
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