A BEJM Contributions article.

Abstract

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.

Submitted: June 1, 2008 · Accepted: January 17, 2009 · Published: January 27, 2009

Recommended Citation

Berriel, Tiago C. and Bhattarai, Saroj (2009) "Monetary Policy and Central Bank Balance Sheet Concerns," The B.E. Journal of Macroeconomics: Vol. 9 : Iss. 1 (Contributions), Article 1.
DOI: 10.2202/1935-1690.1770
Available at: http://www.bepress.com/bejm/vol9/iss1/art1