Discussion Paper Details

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Title: The Theory of Unconventional Monetary Policy

Author(s): Roger E A Farmer and Pawel Zabczyk

Publication Date: March 2016

Keyword(s): Qualitative Easing, Sunspots and Unconventional Monetary Policy

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: 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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Bibliographic Reference

Farmer, R and Zabczyk, P. 2016. 'The Theory of Unconventional Monetary Policy'. London, Centre for Economic Policy Research.