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The Relevance or Otherwise of the Central Bank's Balance Sheet

In: NBER International Seminar on Macroeconomics 2013

  • David Miles
  • Jochen Schanz

This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households' choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.

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This chapter was published in:
  • Richard Clarida & Gita Gopinath & Lucrezia Reichlin, 2014. "NBER International Seminar on Macroeconomics 2013," NBER Books, National Bureau of Economic Research, Inc, number fran13-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13156.
    Handle: RePEc:nbr:nberch:13156
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Christopher A. Sims, 2013. "Paper Money," American Economic Review, American Economic Association, vol. 103(2), pages 563-84, April.
    2. Philippe Weil, 2008. "Overlapping generations: the first jubilee," ULB Institutional Repository 2013/13430, ULB -- Universite Libre de Bruxelles.
    3. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages F271-F288, November.
    4. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    5. Sargent, Thomas J & Smith, Bruce D, 1987. "Irrelevance of Open Market Operations in Some Economies with Government Currency Being Dominated in Rate of Return," American Economic Review, American Economic Association, vol. 77(1), pages 78-92, March.
    6. Dimitri Vayanos & Jean-Luc Vila, 2009. "A Preferred-Habitat Model of the Term Structure of Interest Rates," NBER Working Papers 15487, National Bureau of Economic Research, Inc.
    7. A Durré & H Pill, 2012. "Central Bank balance sheets as policy tools," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 193-213 Bank for International Settlements.
    8. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
    9. Chamley, Christophe & Polemarchakis, Herakles, 1984. "Assets, General Equilibrium and the Neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 129-38, January.
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