Monetary Policy and Central Bank Balance Sheet Concerns
AbstractWe introduce a fiscally independent central bank with balance sheet concerns in the new Keynesian model. The central bank is subject to a budget constraint and state-contingent transfers from the treasury are not allowed. This change renders the standard optimal monetary policy solution non implementable. In addition to facing a budget constraint, when the central bank targets real capital, optimal monetary policy is substantially different from the standard case. In response to a cost-push shock, variation in inflation decreases at the cost of increased output gap variation; there is incomplete stabilization of aggregate demand and money demand shocks; response to a cost-push shock under discretion is similar to that under commitment in the standard model; and the central bank tracks real money balances.
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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): 9 (2009)
Issue (Month): 1 (January)
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Web page: http://www.degruyter.com
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NBER Working Papers
15662, National Bureau of Economic Research, Inc.
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- Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
- Seok Gil Park, 2012. "Central Banks Quasi-Fiscal Policies and Inflation," IMF Working Papers 12/14, International Monetary Fund.
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