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Title: Effectiveness and Addictiveness of Quantitative Easing

Author(s): Peter Karadi and Anton Nakov

Publication Date: June 2020

Keyword(s): Balance-Sheet-Constrained Banks and Large-scale asset purchases

Programme Area(s): Monetary Economics and Fluctuations

Abstract: This paper analyses optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks' capital position. It warns, however, that the policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector and therefore slows down its recapitalization. Consequently, optimal exit from large central bank balance sheets is gradual.

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Bibliographic Reference

Karadi, P and Nakov, A. 2020. 'Effectiveness and Addictiveness of Quantitative Easing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14951