NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Central-Bank Balance Sheet as an Instrument of Monetary Policy

Vasco Curdia, Michael Woodford

NBER Working Paper No. 16208
Issued in July 2010
NBER Program(s):   EFG   ME

While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.

download in pdf format
   (502 K)

email paper

This paper is available as PDF (502 K) or via email.

A data appendix is available at http://www.nber.org/data-appendix/w16208

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16208

Published: Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January. citation courtesy of

Users who downloaded this paper also downloaded these:
Farmer w18007 The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence
Woodford w17967 Inflation Targeting and Financial Stability
Devereux, Senay, and Sutherland w17796 Nominal Stability and Financial Globalization
Ilut and Schneider w17900 Ambiguous Business Cycles
Livshits, MacGee, and Tertilt w17448 Costly Contracts and Consumer Credit
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us