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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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CiteScore 2017: 0.62

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1935-1690
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Monetary Policy and Central Bank Balance Sheet Concerns

Tiago C Berriel / Saroj Bhattarai
Published Online: 2009-01-27 | DOI: https://doi.org/10.2202/1935-1690.1770

We introduce a fiscally independent central bank with balance sheet concerns in the new Keynesian model. The central bank is subject to a budget constraint and state-contingent transfers from the treasury are not allowed. This change renders the standard optimal monetary policy solution non implementable. In addition to facing a budget constraint, when the central bank targets real capital, optimal monetary policy is substantially different from the standard case. In response to a cost-push shock, variation in inflation decreases at the cost of increased output gap variation; there is incomplete stabilization of aggregate demand and money demand shocks; response to a cost-push shock under discretion is similar to that under commitment in the standard model; and the central bank tracks real money balances.

Keywords: monetary policy; inflation targeting; central bank independence; central bank capital; central bank balance sheet

About the article

Published Online: 2009-01-27


Citation Information: The B.E. Journal of Macroeconomics, Volume 9, Issue 1, ISSN (Online) 1935-1690, DOI: https://doi.org/10.2202/1935-1690.1770.

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