DP14951 Effectiveness and Addictiveness of Quantitative Easing

Author(s): Peter Karadi, Anton Nakov
Publication Date: June 2020
Keyword(s): Balance-Sheet-Constrained Banks, Large-scale asset purchases
JEL(s): E32, E44, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14951

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.