Monetary Policy and Central Bank Balance Sheet Concerns
We 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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Volume (Year): 9 (2009)
Issue (Month): 1 (January)
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References listed on IDEAS
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- Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
- Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.