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The Financial Market Effects of Unwinding the Federal Reserve’s Balance Sheet
For the second time in the brief 12-year period between 2008 and 2020, central banks have once again turned to asset purchase programs to combat a global economic downturn. While balance sheet expansions have become familiar, balance sheet normalization has proven more elusive. Nevertheless, an understanding of the consequences of unwinding asset purchases is necessary for well-informed decisions over the deployment of these unconventional policy tools. This paper provides a first analysis of the financial market effects of balance sheet normalization based on the U.S. experience between 2017 ...
A model of monetary policy shocks for financial crises and normal conditions
In late 2008, deteriorating economic conditions led the Federal Reserve to lower the federal funds rate to near zero and inject massive liquidity into the financial system through novel facilities. The combination of conventional and unconventional measures complicates the challenging task of characterizing the effects of monetary policy. We develop a novel method of identifying these effects that maintains the classic assumptions that a central bank reacts to output and the price level contemporaneously and may only affect these variables with a lag. A New-Keynesian DSGE model augmented with ...