Research Discussion Papers, Bank of Finland
No 3/2013:
Unconventional government debt purchases as a supplement to conventional monetary policy
Martin Ellison ()
and Andreas Tischbirek ()
Abstract: In response to the Great Financial Crisis, the Federal
Reserve and the Bank of England have adopted unconventional monetary policy
instruments. We investigate if one of these, purchases of long-term
government debt, could be a valuable addition to conventional short-term
interest rate policy even if the main policy rate is not constrained by the
zero lower bound. To do so we add a stylised financial sector and central
bank asset purchases to an otherwise standard New Keynesian DSGE model.
Asset quantities matter for interest rates through a preferred habitat
channel. If conventional and unconventional monetary policy instruments are
coordinated appropriately then the central bank is better able to stabilise
both output and inflation.
Keywords: quantitative easing; large-scale asset purchases; preferred habitat; optimal monetary policy; (follow links to similar papers)
JEL-Codes: E40; E43; E52; E58; (follow links to similar papers)
26 pages, February 18, 2013
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