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An Expansionary Effect of QE Not via the Signaling Channel

Author

Listed:
  • Hidekazu Niwa

    (Osaka School of International Public Policy, Osaka University)

Abstract
In recent years, central banks have engaged in massive purchases of long-term government bonds once their policy rate is stuck at zero. The standard view is that such a policy influences economic activities by sending the public a signal about the future path of nominal interest rates. I demonstrate that, with an appropriate institutional arrangement between the central bank and the fiscal authority in place, such a policy has an expansionary effect without the signaling channel. The arrangement consists of the two following ingredients. First, the fiscal authority commits to covering possible losses on the central bank's balance sheet. Second, the fiscal authority commits to a certain sequence of primary surpluses. In this setup, the consolidated government's budget must incur losses at a time of liftoff from the zero lower bound. This results in an increase in inflation via the mechanism highlighted by the fiscal theory of the price level.

Suggested Citation

  • Hidekazu Niwa, 2023. "An Expansionary Effect of QE Not via the Signaling Channel," Economics Bulletin, AccessEcon, vol. 43(2), pages 1063-1069.
    • Handle: RePEc:ebl:ecbull:eb-22-00727
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2023/Volume43/EB-23-V43-I2-P87.pdf
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Sebastian A. Merkel & Yuliy Sannikov, 2020. "The Fiscal Theory of Price Level with a Bubble," NBER Working Papers 27116, National Bureau of Economic Research, Inc.
    2. McLaren, Nick & Smith, Tom, 2013. "The profile of cash transfers between the Asset Purchase Facility and Her Majesty’s Treasury," Bank of England Quarterly Bulletin, Bank of England, vol. 53(1), pages 29-37.
    3. John C. Williams, 2012. "The Federal Reserve’s unconventional policies," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue nov13.
    4. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    5. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
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    More about this item

    Keywords

    Central bank's balance sheet; zero lower bound; non-Ricardian regime; fiscal theory of the price level;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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