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Central Banks Quasi-Fiscal Policies and Inflation

  • Seok Gil Park
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    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.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/14.

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    Length: 35
    Date of creation: 01 Jan 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/14
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    1. Troy Davig & Eric M. Leeper & Hess Chung, 2005. "Monetary and fiscal policy switching," Research Working Paper RWP 05-12, Federal Reserve Bank of Kansas City.
    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, June.
    4. G. A. Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
    5. 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.
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