Discussion paper

DP11196 The Theory of Unconventional Monetary Policy

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-fi nancing.

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Citation

Farmer, R and P Zabczyk (2016), ‘DP11196 The Theory of Unconventional Monetary Policy‘, CEPR Discussion Paper No. 11196. CEPR Press, Paris & London. https://cepr.org/publications/dp11196