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How Can a Central Bank Exit Quantitative Easing Without Rapidly Shrinking its Balance Sheet?

Author

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  • Atsushi Tanaka

    (School of Economics, Kwansei Gakuin University)

Abstract

This study constructs a simple dynamic optimization model of a central bank and examines its optimal behavior after exiting quantitative easing using interest-bearing liabilities instead of selling assets and rapidly shrinking its balance sheet. With high interest payments on liabilities, the bank may be forced to expand the monetary base to maintain its solvency, which leads to higher inflation. The model shows when the bank faces such a situation and derives the optimal paths of the monetary base supply and liabilities to deal with this. The study applies the model to the Bank of Japan and examines how the bank can exit quantitative easing.

Suggested Citation

  • Atsushi Tanaka, 2019. "How Can a Central Bank Exit Quantitative Easing Without Rapidly Shrinking its Balance Sheet?," Discussion Paper Series 196, School of Economics, Kwansei Gakuin University.
    • Handle: RePEc:kgu:wpaper:196
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    File URL: http://192.218.163.163/RePEc/pdf/kgdp196.pdf
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    References listed on IDEAS

    as
    1. Mr. Peter Stella & Mr. Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance: An Econometric Evaluation," IMF Working Papers 2008/176, International Monetary Fund.
    2. Gauti Eggertsson & Bulat Gafarov & Saroj Bhatarai, 2014. "Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing," 2014 Meeting Papers 1292, Society for Economic Dynamics.
    3. Robert E. Hall & Ricardo Reis, 2015. "Maintaining Central-Bank Financial Stability under New-Style Central Banking," NBER Working Papers 21173, National Bureau of Economic Research, Inc.
    4. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    5. Fujiki, Hiroshi & Tomura, Hajime, 2017. "Fiscal cost to exit quantitative easing: the case of Japan," Japan and the World Economy, Elsevier, vol. 42(C), pages 1-11.
    6. Arthur Galego Mendes & Tiago Couto Berriel, "undated". "Central Bank Balance Sheet, Liquidity Trap, and Quantitative Easing," Textos para discussão 638, Department of Economics PUC-Rio (Brazil).
    7. Mr. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 1997/083, International Monetary Fund.
    8. Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
    9. Ms. Claudia H Dziobek & Mr. John W. Dalton, 2005. "Central Bank Losses and Experiences in Selected Countries," IMF Working Papers 2005/072, International Monetary Fund.
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    Cited by:

    1. Atsushi Tanaka, 2021. "Central Bank Capital and Credibility: A Literature Survey," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(2), pages 249-262, June.
    2. Atsushi Tanaka, 2020. "Central Bank Capital and Credibility: A Literature Survey," Discussion Paper Series 208, School of Economics, Kwansei Gakuin University, revised May 2020.

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    More about this item

    Keywords

    central bank; monetary base; inflation; quantitative easing; exit strategy; solvency.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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