Quasi-Fiscal Policies of Independent Central Banks and Inflation

Seok Gil Park ()
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Seok Gil Park: Indiana University

No 2009-020, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-fiscal operations are significant in size and assumed to be crucial for the economy's recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-fiscal shocks may affect inflation in plausible cases by utilizing a simple DSGE model that embraces the budgetary independence of the central banks. In the active quasi-fiscal policy regime, the shocks in the central bank's earnings alter the private agent's portfolio between consumption and the nominal money balance, thus affecting inflation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-fiscal shocks may produce undesirable effects, such as inflation following deflationary monetary policy during the implementation of exit strategy.

Pages: 44 pages
Date: 2009-10
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2009020

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