Central Banks' Quasi-Fiscal Policies and Inflatione
by Seok Gil Parka
Although central banks recently expanded their balance
sheets by unconventional policy actions, little theory is available
to explain how and when central banks’ balance sheets
affect inflation and impose restrictions on monetary policy.
A DSGE model predicts that central banks’ balance sheet
shocks affect inflation through private agents’ portfolio adjustments
when fiscal authorities do not financially support central
banks. In those cases, central banks cannot successfully unwind
inflated balance sheets and stabilize inflation during the implementation
of exit strategy. Therefore, fiscal authorities’ backup
is a pre-condition for effective monetary policy when central
banks are engaged in quasi-fiscal policy roles.
JEL Codes: E31, E58, E63.
Full article (PDF, 38 pages, 409 kb)
a International Monetary Fund