Central Banks Quasi-Fiscal Policies and Inflation

Seok Park

No 2012/014, IMF Working Papers from International Monetary Fund

Abstract: Although central banks have recently taken unconventional policy actions to try to shore up macroeconomic and financial stability, little theory is available to assess the consequences of such measures. This paper offers a theoretical model with which such policies can be analyzed. In particular, the paper shows that in the absence of the fiscal authorities' full backing of the central bank's balance sheet, strange things can happen. For instance, an exit from quantitative easing could be inflationary and central banks cannot successfully unwind inflated balance sheets. Therefore, the fiscal authorities' full backing of the monetary authorities' quasi-fiscal operations is a pre-condition for effective monetary policy.

Keywords: WP; price level; equilibrium price; Central bank’s balance sheet; Fiscal theory of price level; Quasi-fiscal policy; budget constraint; net liability valuation formula; asset account; loss function; liability value; asset return; asset maturity structure; government bonds holding; monetary policy behavior; Quasi-fiscal operations; Inflation; Central bank balance sheet; Bonds; Asset prices (search for similar items in EconPapers)
Pages: 35
Date: 2012-01-01
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Citations: View citations in EconPapers (5)

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