The Optimal Conduct of Central Bank Asset Purchases

59 Pages Posted: 25 Jul 2017

See all articles by Matthieu Darracq Paries

Matthieu Darracq Paries

European Central Bank (ECB)

Michael Kuehl

Deutsche Bundesbank - Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: 2017


We analyse the effects of central bank government bond purchases in an estimated DSGE model for the euro area. In the model, central bank asset purchases are relevant in so far as agency costs distort banks' asset allocation between loans and bonds, and households face transaction costs when trading government bonds. Such frictions in the banking sector induce inefficient time-variation in the term premia and allow for a credit channel of central bank government bond purchases. Considering ad hoc asset purchase programmes like the one implemented by the ECB, we show that their macroeconomic multipliers get stronger when the lower bound on the policy rate becomes binding and when the purchasing path is fully communicated and anticipated by the agents. From a more normative standpoint, interest rate policy and asset purchases feature strong strategic complementarities during both normal and crisis times. In an environment when nominal interest rates reach their effective lower bound, optimal monetary policy is to keep the policy rate low for a longer period in time and to engage in asset purchases. Our results also point to a clear sequencing of the exit strategy, first stopping the asset purchases and later raising the policy rate. In terms of macroeconomic stabilisation, optimal asset purchase strategies deliver sizeable benefits and have the potential to largely offset the costs of the lower bound on the policy rate.

Keywords: Zero Lower Bound, Optimal Monetary Policy, Banking, Quantitative Easing, DSGE

JEL Classification: C61, E52, G11

Suggested Citation

Darracq Paries, Matthieu and Kühl, Michael, The Optimal Conduct of Central Bank Asset Purchases (2017). Bundesbank Discussion Paper No. 22/2017. Available at SSRN:

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
+496913446631 (Phone)
+496913447604 (Fax)

Michael Kühl

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main

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