The theory of unconventional monetary policy

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 02 September 2016

Working Paper No. 613
By Roger E A Farmer and Pawel Zabczyk 

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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