New Perspectives on Quantitative Easing and Central Bank Capital Policies

By Tobias Adrian, Christopher J. Erceg, Marcin Kolasa, Jesper Lindé, Roger McLeod, Romain M Veyrune, Pawel Zabczyk

May 17, 2024

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Tobias Adrian, Christopher J. Erceg, Marcin Kolasa, Jesper Lindé, Roger McLeod, Romain M Veyrune, and Pawel Zabczyk. New Perspectives on Quantitative Easing and Central Bank Capital Policies, (USA: International Monetary Fund, 2024) accessed November 9, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Central banks have come under increasing criticism for large balance sheet losses associated with quantitative easing (QE), and some observers have also argued that QE helped fuel the post-COVID-19 inflation boom. In this paper, we reconsider the conditions under which QE may be warranted considering the recent high inflation experience. We emphasize that the merits of QE should be evaluated based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, and not simply on central bank profits or losses. Using an open economy DSGE model with segmented asset markets, we show how QE can provide a sizeable boost to output and inflation in a deep recession and improve the consolidated fiscal position—even if the central bank experiences considerable losses. However, the commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic call for more caution in using QE closer to full employment. We then consider how central banks might modify their policies for allocating profits to the government in light of large-scale losses. In short, we suggest that a more forward-looking and risk-based approach may be desirable in helping protect central bank financial autonomy and ultimately independence.

Subject: Central bank policy rate, Financial services, Financial statements, Fiscal policy, Fiscal stance, Inflation, Monetary policy, Prices, Public financial management (PFM), Unconventional monetary policies

Keywords: Central bank Capital Policies, Central bank policy rate, Central bank profit, Central bank remittance, Central bank remittances, Financial statements, Fiscal stance, Forward guidance, Global, Inflation, Monetary policy, Profits to the government, Quantitative easing, Unconventional monetary policies, Upside inflation risk

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/103
Stock No:

WPIEA2024103
ISBN:

9798400277061
ISSN:

1018-5941

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