Template-Type: ReDIF-Paper 1.0
Author-Name: Benoit Mojon
Author-X-Name-First: Benoit
Author-X-Name-Last: Mojon
Author-Name: Phurichai Rungcharoenkitkul
Author-X-Name-First: Phurichai
Author-X-Name-Last: Rungcharoenkitkul
Author-Name: Dora Xia
Author-X-Name-First: Dora
Author-X-Name-Last: Xia
Title: Integrating balance sheet policy into monetary policy conditions
Abstract: This paper introduces a new Monetary Policy Condition Index (MCI) that integrates conventional and unconventional monetary policy tools into a unified measure. The MCI is a weighted average of short-term interest rate and central bank balance sheet size, improving upon the shadow rate by capturing balance sheet policy effects away from the effective lower bound. We estimate the MCI's weight and its dynamic relationships with output, inflation and financial conditions using a Bayesian Vector Autoregression (BVAR) framework. Results suggest that large balance sheet policies have exerted a significant accommodative influence on monetary policy conditions, including away from the effective lower bound. Through historical decomposition and counterfactual exercises, the MCI provides new insights into unconventional policy's effectiveness and unintended consequences. The framework can flexibly accommodate numerous extensions, including possibly higher neutral balance sheet under ample reserve system.
Creation-Date: 2025-07
File-URL: https://www.bis.org/publ/work1281.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1281.htm
File-Format: text/html
Number: 1281
Keywords: monetary policy, monetary policy conditions, financial conditions, unconventional monetary policy, central bank balance sheet, ample reserves system
Classification-JEL: E51, E52, E58
Handle: RePEc:bis:biswps:1281