Has Woodford Gone Soft on the Interest Rate Channel?

Probably not, but here is the abstract from Michael Woodford and Vasco Curdía’s new paper entitled, “The Central Bank Balance Sheet as an Instrument of Monetary Policy”:

While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.

There is a lot to digest here — the paper is over 80 pages. Nonetheless, I would argue that the central bank balance sheet is not an instrument of monetary policy, but the instrument. More on this later.

2 responses to “Has Woodford Gone Soft on the Interest Rate Channel?

  1. Pingback: The Death of the Federal Funds Rate? | The Everyday Economist

  2. Pingback: Creating a generation of savers might help protect your grandchildren against a future financial meltdown. If the economy was growing rapidly, banks were prepared to give money and bank cards were an easy task to obtain. This light emitting diode individu

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