Working Paper: CEPR ID: DP14951
Authors: Peter Karadi; Anton Nakov
Abstract: This paper analyses optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks' capital position. It warns, however, that the policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector and therefore slows down its recapitalization. Consequently, optimal exit from large central bank balance sheets is gradual.
Keywords: Large-scale asset purchases; Balance-sheet-constrained banks
JEL Codes: E32; E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adverse financial disturbances (E44) | Impaired credit conditions (G21) |
| Impaired credit conditions (G21) | Necessitate QE (C54) |
| QE (E01) | Eases banks' balance sheet constraints (G21) |
| QE (E01) | Extends more credit to the private sector (G21) |
| Initial success of QE (E49) | Slower recovery in bank equity (F65) |
| Optimal QE policy (C54) | Align with recovery of bank capital (G28) |
| Gradual unwinding of QE policies (C54) | Avoid reintroducing credit frictions (E51) |