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The macroeconomic effects of reducing a central bank monetary policy portfolio: a model-based evaluation

Author

Listed:
  • Anna Bartocci

    (Bank of Italy)

  • Alessandro Notarpietro

    (Bank of Italy)

  • Massimiliano Pisani

    (Bank of Italy)

Abstract

We use a New Keynesian model with financial market segmentation, calibrated to the euro area, to analyze the macroeconomic effects of a reduction in the stock of long-term sovereign bonds held by a central bank, as the latter does not reinvest the principal payments from maturing bonds. In the model, this reduction affects real and financial variables because a preferred habitat assumption holds for some investors. According to our results, the reduction, by inducing a rise in long-term interest rates, has recessionary and disinflationary effects. These effects are amplified if the central bank does not adequately reduce the policy rate, or if financial markets overreact in the short run to the announcement of the monetary policy portfolio reduction.

Suggested Citation

  • Anna Bartocci & Alessandro Notarpietro & Massimiliano Pisani, 2024. "The macroeconomic effects of reducing a central bank monetary policy portfolio: a model-based evaluation," Temi di discussione (Economic working papers) 1472, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1472_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1472/en_tema_1472.pdf
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    More about this item

    Keywords

    dynamic general equilibrium model; monetary policy; euro area; central bank balance sheet; non-standard monetary policy measures;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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