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The Theory of Unconventional Monetary Policy

Listed author(s):
  • Farmer, Roger E A
  • Zabczyk, Pawel

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.

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File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11196
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11196.

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Date of creation: Mar 2016
Handle: RePEc:cpr:ceprdp:11196
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  1. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters,in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  2. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
  3. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
  4. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, 01.
  5. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
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