Non-Neutrality of Open-Market Operations

Abstract

Unconventional monetary policy can have consequences for inflation and output because of income losses on central-bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to back central bank's losses through appropriate transfers levied as taxes on the private sector. In absence of fiscal backing, large and recurrent central bank's losses can undermine its long-run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses are backed by future profits without any further consequences. A central bank averse to declining net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. If fiscal policy is active, it is also desirable to reduce the duration of central bank's losses through higher inflation.

Keywords: central bank's balance sheet, QE, unconventional monetary policy

JEL Classification: E40