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Funding Quantitative Easing to Target Inflation

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  • Ricardo Reis

    () (Centre for Macroeconomics (CFM)
    London School of Economics and Political Science (LSE))

Abstract

The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an effect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank’s interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.

Suggested Citation

  • Ricardo Reis, 2016. "Funding Quantitative Easing to Target Inflation," Discussion Papers 1626, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1626
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    Cited by:

    1. Ricardo Reis, 2018. "Is something really wrong with macroeconomics?," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 132-155.
    2. Ricardo Reis, 2017. "Is Something Really Wrong with Macroeconomics?," CESifo Working Paper Series 6446, CESifo Group Munich.
    3. Ricardo Reis, 2019. "Central Banks Going Long," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.), Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 3, pages 043-081, Central Bank of Chile.
    4. N. Gregory Mankiw & Ricardo Reis, 2018. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 81-96, Winter.
    5. Berentsen, Aleksander & Kraenzlin, Sébastien & Müller, Benjamin, 2018. "Exit strategies for monetary policy," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 20-40.
    6. Lenel, Moritz & Piazzesi, Monika & Schneider, Martin, 2019. "The short rate disconnect in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 59-77.
    7. Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
    8. Hall, Robert E. & Reis, Ricardo, 2016. "Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves," CEPR Discussion Papers 11578, C.E.P.R. Discussion Papers.
    9. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    10. R. Wouters, 2016. "The transmission mechanism of new and traditional instruments of monetary and macroprudential policy," Economic Review, National Bank of Belgium, issue iii, pages 105-117, December.
    11. Ricardo Reis, 2018. "Central Banks Going Long," CESifo Working Paper Series 6998, CESifo Group Munich.
    12. Ricardo Reis, 2017. "Can the Central Bank Alleviate Fiscal Burdens?," CESifo Working Paper Series 6604, CESifo Group Munich.
    13. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," NBER Working Papers 23014, National Bureau of Economic Research, Inc.
    14. Reis, Ricardo, 2018. "Is something really wrong with macroeconomics?," LSE Research Online Documents on Economics 85671, London School of Economics and Political Science, LSE Library.
    15. Ricardo Reis, 2017. "Comment on "Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound"," NBER Chapters, in: NBER Macroeconomics Annual 2017, volume 32, pages 246-260, National Bureau of Economic Research, Inc.
    16. Goodhart, Charles, 2017. "A Central Bank’s optimal balance sheet size?," LSE Research Online Documents on Economics 84205, London School of Economics and Political Science, LSE Library.
    17. Anne-Marie Rieu-Foucault, 2018. "Les interventions de crise de la FED et de la BCE diffèrent-elles ?," EconomiX Working Papers 2018-31, University of Paris Nanterre, EconomiX.
    18. Gabriel Stein, 2018. "The Challenges for Central Banks," Economic Affairs, Wiley Blackwell, vol. 38(1), pages 131-138, February.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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