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Funding Quantitative Easing to Target Inflation

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  • Reis, Ricardo

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

  • Reis, Ricardo, 2016. "Funding Quantitative Easing to Target Inflation," CEPR Discussion Papers 11505, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11505
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ricardo Reis, 2016. "Can the Central Bank Alleviate Fiscal Burdens?," NBER Working Papers 23014, National Bureau of Economic Research, Inc.
    2. Robert E. Hall & Ricardo Reis, 2016. "Achieving Price Stability by Manipulating the Central Bank’s Payment on Reserves," NBER Working Papers 22761, National Bureau of Economic Research, Inc.
    3. N. Gregory Mankiw & Ricardo Reis, 2017. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," NBER Working Papers 24043, National Bureau of Economic Research, Inc.
    4. 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.
    5. Ricardo Reis, 2017. "Is Something Really Wrong with Macroeconomics?," CESifo Working Paper Series 6446, CESifo Group Munich.
    6. 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.

    More about this item

    Keywords

    Event studies; Large scale asset purchases; Monetarism; Monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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