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

Ricardo Reis

NBER Working Paper No. 22415
Issued in July 2016
NBER Program(s):Monetary Economics

Analysis 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 asset, neither substitutable by currency nor by government debt.

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Document Object Identifier (DOI): 10.3386/w22415

Published: Ricardo Reis, 2017. "QE in the Future: The Central Bank’s Balance Sheet in a Fiscal Crisis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 71-112, April. citation courtesy of

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