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Balance sheet policies and Central Bank losses in a HANK model

Charles Labrousse and Yann Perdereau

PSE Working Papers from HAL

Abstract: What are the effects of central bank balance sheet expansion, and should we worry about central bank losses? Using a Heterogeneous Agent New Keynesian model incorporating money in utility and an endogenous zero lower bound (ZLB), we study the fiscal-monetary interaction of central bank balance sheet policies. We find that the overall efficiency of QE and QT policies depends on the combination of the expected future size of the balance sheet and the fiscal transmission of central bank losses. First, permanent balance sheet expansions stimulate the economy in the long-run and, by anticipation, increase inflation and output during the ZLB episode, as they interact with distortionary taxes and imperfect capital markets. Second, at the end of the ZLB, the central bank incurs losses: issuing securities to offset these losses is more welfare-enhancing than raising taxes.

Keywords: Monetary policy; Heterogeneous agents; Balance sheet; Quantitative Easing; Quantitative Tightening; CB losses; Fiscal and monetary policy mix (search for similar items in EconPapers)
Date: 2024-05
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04577286
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