QE in the future: the central bank’s balance sheet in a fiscal crisis

Ricardo Reis

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Analyses of quantitative easing (QE) typically focus on the recent past studying the policy’s effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank’s balance sheet can interfere with each of these channels, stabilizing inflation and economic activity. The power of QE comes from interest-paying reserves being a special public liability, neither substitutable by currency nor by government debt.

JEL-codes: E44 E58 E63 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

Published in IMF Economic Review, April, 2017, 65(1), pp. 71 - 112. ISSN: 2041-4161

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http://eprints.lse.ac.uk/74329/ Open access version. (application/pdf)

Related works:
Journal Article: QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis (2017)
Working Paper: QE in the future: the central bank's balancesheet in a fiscal crisis (2016)
Working Paper: QE in the future: the central bank’s balance sheet in a fiscal crisis (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:74329

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