New Perspectives on Quantitative Easing and Central Bank Capital Policies

IMF Working Papers, May 17, 2024

Source details

Canonical URL: New Perspectives on Quantitative Easing and Central Bank Capital Policies

Authors: Tobias Adrian, Christopher J. Erceg, Marcin Kolasa, Jesper Lindé, Roger McLeod, Romain M Veyrune, Pawel Zabczyk
Published: May 17, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400277061.001

Central banks have faced criticism for large balance sheet losses associated with quantitative easing (QE) and arguments that QE helped fuel the post-COVID-19 inflation boom.
The paper reconsiders conditions under which QE may be warranted in light of recent high inflation experience.
Key evaluative principle: the merits of QE should be judged based on the macroeconomic stimulus it provides and its effects on the consolidated fiscal position, not simply on central bank profits or losses.
Using an open economy DSGE model with segmented asset markets, the authors show:
- QE can provide a sizeable boost to output and inflation in a deep recession.
- QE can improve the consolidated fiscal position even if the central bank experiences considerable losses.
Caveats:
- Commitment-based features of QE and the possibility that upside inflation risks are bigger than recognized pre-pandemic argue for more caution in using QE closer to full employment.

Analytical approach: an open economy DSGE model with segmented asset markets.
Demonstrated outcomes:
- Sizeable macroeconomic stimulus (output and inflation) from QE in deep recessions.
- Fiscal consolidation effects via improvements in the consolidated fiscal position despite central bank accounting losses.
Risk considerations:
- The importance of recognizing upside inflation risks that may be underestimated.
- The role of QE’s commitment features in shaping macroeconomic outcomes, especially near full employment.

Reassess QE decisions using macroeconomic stimulus and consolidated fiscal impacts rather than central bank profit/loss signals alone.
Exercise greater caution in deploying QE when the economy is nearer to full employment due to upside inflation risks and commitment dynamics.
On central bank profit allocation and capital policies:
- Consider modifying policies for allocating profits to the government in light of large-scale losses.
- Suggestion: adopt a more forward-looking and risk-based approach to profit remittances and capital policy to help protect central bank financial autonomy and ultimately independence.