NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Theory of Unconventional Monetary Policy

Roger Farmer, Pawel Zabczyk

NBER Working Paper No. 22135
Issued in March 2016, Revised in December 2016
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, Monetary Economics

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.

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Document Object Identifier (DOI): 10.3386/w22135

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