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Unconventional government debt purchases as a supplement to conventional monetary policy

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Abstract

In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.

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  • Martin Ellison, 2013. "Unconventional government debt purchases as a supplement to conventional monetary policy," Economics Series Working Papers 679, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:679
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    Cited by:

    1. Philipp Kirchner & Benjamin Schwanebeck, 2017. "Optimal Unconventional Monetary Policy in the Face of Shadow Banking," MAGKS Papers on Economics 201725, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge & Wieland, Volker, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
    3. Fritz Breuss, 2016. "The Crisis Management of the ECB," WIFO Working Papers 507, WIFO.
    4. Darracq Pariès, Matthieu & Kühl, Michael, 2016. "The optimal conduct of central bank asset purchases," Working Paper Series 1973, European Central Bank.
    5. Kühl, Michael, 2016. "The effects of government bond purchases on leverage constraints of banks and non-financial firms," Discussion Papers 38/2016, Deutsche Bundesbank.
    6. Philip Turner, 2014. "The exit from non-conventional monetary policy: what challenges?," BIS Working Papers 448, Bank for International Settlements.
    7. Quint, Dominic & Rabanal, Pau, 2017. "Should unconventional monetary policies become conventional?," Discussion Papers 28/2017, Deutsche Bundesbank.
    8. Andreas Tischbirek, 2016. "Unconventional Monetary Policy in a Currency Union with Segmentation in the Market for Government Debt," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 16.16, Université de Lausanne, Faculté des HEC, DEEP.
    9. Konstantin Makrelov & Channing Arndt & Rob Davies & Laurence Harris, 2018. "Stock-and-flow-consistent macroeconomic model for South Africa," WIDER Working Paper Series 007, World Institute for Development Economic Research (UNU-WIDER).
    10. Serdar Kabaca, 2016. "Quantitative Easing in a Small Open Economy: An International Portfolio Balancing Approach," Staff Working Papers 16-55, Bank of Canada.
    11. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.
    12. Harrison, Richard, 2017. "Optimal quantitative easing," Bank of England working papers 678, Bank of England.
    13. Christopher Spencer, 2014. "Conventional and Unconventional Votes: A Tale of Three Monetary Policy Committees," Discussion Paper Series 2014_11, Department of Economics, Loughborough University, revised Dec 2014.
    14. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.
    15. Benjamin Schwanebeck, 2017. "Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union," MAGKS Papers on Economics 201741, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    16. Crowley, Patrick M. & Garcia, Enrique & Quah Chee-Heong, 2013. "Is Europe growing together or growing apart?," Research Discussion Papers 33/2013, Bank of Finland.

    More about this item

    Keywords

    Quantitative Easing; Large-Scale Asset Purchases; Preferred Habitat; Optimal Monetary Policy;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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