TY  - JOUR
AU  - Curdia,Vasco
AU  - Woodford,Michael
TI  - The Central-Bank Balance Sheet as an Instrument of Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16208
PY  - 2010
Y2  - July 2010
UR  - http://www.nber.org/papers/w16208
L1  - http://www.nber.org/papers/w16208.pdf
N1  - Author contact info:
Vasco Curdia
Federal Reserve Bank of New York
33 Liberty Street, 3rd Floor
New York, NY 10045
Tel: 2127205994
E-Mail: Vasco.Curdia@ny.frb.org

Michael Woodford
Department of Economics
Columbia University
420 W. 118th Street
New York, NY 10027
Tel: 212/854-1094
Fax: 212-854-8059
E-Mail: mw2230@columbia.edu
AB  - 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.
ER  -