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Non-Neutrality of Open-Market Operations

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  • Benigno, Pierpaolo
  • Nisticò, Salvatore

Abstract

Unconventional open-market operations can have consequences for inflation and output because of income losses on central-bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to cover central bank's losses through appropriate transfers levied as taxes on the private sector. In absence of treasury's support, large and recurrent central bank's losses can undermine its long-run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses can be absorbed by future retained earnings without any further consequences on prices. A central bank averse to declining net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. In absence of taxpayers' support, it is also desirable to increase inflation to the end of reducing the duration of central bank's losses.

Suggested Citation

  • Benigno, Pierpaolo & Nisticò, Salvatore, 2015. "Non-Neutrality of Open-Market Operations," CEPR Discussion Papers 10594, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10594
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    Cited by:

    1. Reis, Ricardo, 2016. "Funding quantitative easing to target inflation," LSE Research Online Documents on Economics 67883, London School of Economics and Political Science, LSE Library.
    2. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," NBER Working Papers 23014, National Bureau of Economic Research, Inc.
    3. 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.
    4. R.J. Galema & S. Lugo, 2017. "When central banks buy corporate bonds: : Target selection and impact of the European Corporate Sector Purchase Program," Working Papers 17-16, Utrecht School of Economics.
    5. repec:eee:macchp:v2-2185 is not listed on IDEAS
    6. Amador, Manuel & Bianchi, Javier & Bocola, Luigi & Perri, Fabrizio, 2016. "Reverse speculative attacks," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 125-137.

    More about this item

    Keywords

    central bank's balance sheet; QE; unconventional monetary policy;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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