A Monetary Analysis of Balance Sheet Policies

30 Pages Posted: 19 Jan 2016

See all articles by Markus Hörmann

Markus Hörmann

TU Dortmund University; Ruhr Graduate School in Economics

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: December 2015

Abstract

We augment a standard macroeconomic model to analyse the effects and limitations of balance sheet policies. We show that the central bank can stimulate real activity by changing the size or the composition of its balance sheet, when interest rate policy is ineffective. Specifically, the central bank can stabilise the economy by increasing money supply against eligible assets even when the policy rate is at the zero lower bound. By changing the composition of its balance sheet, it can affect interest rates and, for example, neutralise increases in firms' borrowing costs, which is not possible under a single instrument regime. We further analyse the limitations of balance sheet policies and show that they are particularly useful under liquidity demand shocks.

Suggested Citation

Hörmann, Markus and Schabert, Andreas, A Monetary Analysis of Balance Sheet Policies (December 2015). The Economic Journal, Vol. 125, Issue 589, pp. 1888-1917, 2015. Available at SSRN: https://ssrn.com/abstract=2716792 or http://dx.doi.org/10.1111/ecoj.12167

Markus Hörmann (Contact Author)

TU Dortmund University ( email )

D-44221 Dortmund, D-44221
Germany

Ruhr Graduate School in Economics ( email )

Hohenzollernstr. 1-3
Essen, NRW 45128
Germany

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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