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Quasi-Fiscal Policies of Independent Central Banks and Inflation

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  • Seok Gil Park

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    (Indiana University)

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    Abstract

    Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-?scal operations are signi?cant in size and assumed to be crucial for the economy?s recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-?scal shocks may a¤ect in?ation in plausible cases by utilizing a simple DSGE model that embraces the budgetary inde- pendence of the central banks. In the active quasi-?scal policy regime, the shocks in the central bank?s earnings alter the private agent?s portfolio between consumption and the nominal money balance, thus a¤ecting in?ation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-?scal shocks may produce undesirable e¤ects, such as in?ation following de?ationary mone- tary policy during the implementation of exit strategy.

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    Bibliographic Info

    Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2009-020.

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    Length: 44 pages
    Date of creation: Oct 2009
    Date of revision:
    Handle: RePEc:inu:caeprp:2009-020

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