## New Perspectives on Quantitative Easing and Central Bank Capital Policies

_IMF Working Papers, May 17, 2024_

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## Bibliographic details
- 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

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### Summary and central findings
- 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.

### Model, scenarios, and technical emphasis
- 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.

### Policy recommendations and institutional proposals
- 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.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2024/05/17/new-perspectives-on-quantitative-easing-and-central-bank-capital-policies-549168_