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QE in the future: the central bank’s balance sheet in a fiscal crisis

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  • Reis, Ricardo

Abstract

Analyses of quantitative easing (QE) typically focus on the recent past studying the policy’s effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank’s balance sheet can interfere with each of these channels, stabilizing inflation and economic activity. The power of QE comes from interest-paying reserves being a special public liability, neither substitutable by currency nor by government debt.

Suggested Citation

  • Reis, Ricardo, 2017. "QE in the future: the central bank’s balance sheet in a fiscal crisis," LSE Research Online Documents on Economics 74329, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:74329
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    File URL: http://eprints.lse.ac.uk/74329/
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    Cited by:

    1. Bailey, Andrew & Bridges, Jonathan & Harrison, Richard & Jones, Josh & Mankodi, Aakash, 2020. "The central bank balance sheet as a policy tool: past, present and future," Bank of England working papers 899, Bank of England.
    2. Burlon, Lorenzo & Notarpietro, Alessandro & Pisani, Massimiliano, 2019. "Macroeconomic effects of an open-ended asset purchase programme," Journal of Policy Modeling, Elsevier, vol. 41(6), pages 1144-1159.
    3. Belke, Ansgar & Gros, Daniel, 2021. "QE in the euro area: Has the PSPP benefited peripheral bonds?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    4. Marco Bassetto & Gherardo Gennaro Caracciolo, 2021. "Monetary/Fiscal Interactions with Forty Budget Constraints," Working Papers 788, Federal Reserve Bank of Minneapolis.
    5. Belke, Ansgar & Gros, Daniel, 2019. "QE in the euro area: Has the PSPP benefited peripheral bonds?," Ruhr Economic Papers 803, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    6. Christiaan van der Kwaak, 2024. "Monetary financing does not produce miraculous fiscal multipliers," Discussion Papers 2417, Centre for Macroeconomics (CFM).
    7. Jean Barthélemy & Guillaume Plantin, 2018. "Fiscal and Monetary Regime: A Strategic Approach," SciencePo Working papers hal-03815028, HAL.
    8. Vito Polito, 2020. "Nonlinear Business Cycle and Optimal Policy: A VSTAR Perspective," CESifo Working Paper Series 8060, CESifo.
    9. repec:spo:wpmain:info:hdl:2441/4ur0l3qlso8ol9dcc5iu9grv5c is not listed on IDEAS
    10. repec:hal:spmain:info:hdl:2441/4ur0l3qlso8ol9dcc5iu9grv5c is not listed on IDEAS
    11. Christophe Blot & Jérôme Creel & Paul Hubert, 2017. "What should the ECB "New Normal" look like ?," Post-Print hal-03567432, HAL.
    12. Begoña Domínguez & Pedro Gomis‐Porqueras, 2023. "Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 945-974, June.
    13. Dimitris Malliaropulos & Petros Migiakis, 2018. "Quantitative easing and sovereign bond yields: a global perspective," Working Papers 253, Bank of Greece.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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