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1 results

  • A SUNSPOT-BASED THEORY OF UNCONVENTIONAL MONETARY POLICY

  • Roger E. A. Farmer, Pawel Zabczyk
  • Journal:
    Macroeconomic Dynamics / Volume 26 / Issue 1 / January 2022
    Published online by Cambridge University Press:
    15 July 2020, pp. 186-217

  • This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome.