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Central Banks Quasi-Fiscal Policies and Inflation

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  • Seok G Park

Abstract

Although central banks have recently taken unconventional policy actions to try to shore up macroeconomic and financial stability, little theory is available to assess the consequences of such measures. This paper offers a theoretical model with which such policies can be analyzed. In particular, the paper shows that in the absence of the fiscal authorities' full backing of the central bank's balance sheet, strange things can happen. For instance, an exit from quantitative easing could be inflationary and central banks cannot successfully unwind inflated balance sheets. Therefore, the fiscal authorities' full backing of the monetary authorities' quasi-fiscal operations is a pre-condition for effective monetary policy.

Suggested Citation

  • Seok G Park, 2012. "Central Banks Quasi-Fiscal Policies and Inflation," IMF Working Papers 12/14, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/14
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    References listed on IDEAS

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    1. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, June.
    2. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    3. Charles Goodhart, 1988. "The Evolution of Central Banks," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262570734, January.
    4. Berriel Tiago C & Bhattarai Saroj, 2009. "Monetary Policy and Central Bank Balance Sheet Concerns," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-33, January.
    5. George A Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
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    Cited by:

    1. Croitoru Lucian, 2014. "The Liquidity Trap, Democracy and Central Bank Independence," Scientific Annals of Economics and Business, De Gruyter Open, vol. 61(1), pages 1-14, July.

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