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Quasi-Fiscal Policies of Independent Central Banks and Inflation

Seok Gil Park

Indiana University Bloomington - Department of Economics

October 30, 2009

Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-fiscal operations are signficant in size and assumed to be crucial for the economy's recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-fiscal shocks may affect infltion in plausible cases by utilizing a simple DSGE model that embraces the budgetary independence of the central banks. In the active quasi-fiscal policy regime, the shocks in the central bank's earnings alter the private agent's portfolio between consumption and the nominal money balance, thus affecting inflation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-fiscal shocks may produce undesirable effects, such as inflation following deflationary monetary policy during the implementation of exit strategy.

Number of Pages in PDF File: 44

Keywords: Central bank balance sheet, Quasi-…scal policy, Policy interactions, Central bank's budgetary independence

JEL Classification: E31, E58, E63

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Date posted: November 9, 2009  

Suggested Citation

Park, Seok Gil, Quasi-Fiscal Policies of Independent Central Banks and Inflation (October 30, 2009). Available at SSRN: https://ssrn.com/abstract=1502868 or http://dx.doi.org/10.2139/ssrn.1502868

Contact Information

Seok Gil Park (Contact Author)
Indiana University Bloomington - Department of Economics ( email )
Wylie Hall
Bloomington, IN 47405-6620
United States

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References:  19