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Central Bank Exit Strategies: Domestic Transmission and International Spillovers

Author

Listed:
  • Christopher Erceg

    (Monetary and Capital Markets Department, IMF)

  • Marcin Kolasa

    (Monetary and Capital Markets Department, IMF)

  • Jesper Lindé

    (Monetary and Capital Markets Department, IMF)

  • Haroon Mumtaz

    (School of Economics & Finance, Queen Mary University London)

  • Pawel Zabczyk

    (Monetary and Capital Markets Department, IMF)

Abstract

We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the onlyeffective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.

Suggested Citation

  • Christopher Erceg & Marcin Kolasa & Jesper Lindé & Haroon Mumtaz & Pawel Zabczyk, 2024. "Central Bank Exit Strategies: Domestic Transmission and International Spillovers," Working Papers 978, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:978
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary Policy; Quantitative Easing; International Spillovers;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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