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Funding quantitative easing to target inflation

Reis, Ricardo (2016) Funding quantitative easing to target inflation. CFM discussion paper series (CFM-DP2016-26). Centre For Macroeconomics, London, UK.

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Abstract

The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an e↵ect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank’s interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2016 The Author
Divisions: Economics
Subjects: H Social Sciences > HG Finance
Date Deposited: 28 Sep 2016 09:32
Last Modified: 15 Mar 2022 09:45
URI: http://eprints.lse.ac.uk/id/eprint/67883

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