Template-Type: ReDIF-Paper 1.0
Author-Name: Egemen Eren
Author-X-Name-First: Egemen
Author-X-Name-Last: Eren
Author-Name: Timothy Jackson
Author-X-Name-First: Timothy
Author-X-Name-Last: Jackson
Author-Name: Giovanni Lombardo
Author-X-Name-First: Giovanni
Author-X-Name-Last: Lombardo
Title: The macroprudential role of central bank balance sheets
Abstract: Is there a role for central bank balance sheet policies away from the effective lower bound on interest rates? We extend the canonical DSGE model with financial frictions to include a fully specified central bank balance sheet. We find that the balance sheet size and composition can play a macroprudential role in improving the efficacy of monetary policy. The optimal balance-sheet policy aims at affecting duration risk held by banks in order to increase their resilience to shocks. Optimal short-run balance sheet policies bring no additional advantage to using the policy rate alone provided the optimal long-run balance sheet is already in place. Our results also highlight a key role for government debt maturity and bank regulation in determining optimal central bank balance sheets. 
Creation-Date: 2024-03
File-URL: https://www.bis.org/publ/work1173.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1173.htm
File-Format: text/html
Number: 1173
Keywords: optimal monetary policy, central bank balance sheet, government debt, reserves, financial frictions, macroprudential
Classification-JEL: E42, E44, E51, E52, G2
Handle: RePEc:bis:biswps:1173