Cover IMF Working Papers
Buy Book in Print
Central Bank Exit Strategies Domestic Transmission and International Spillovers
Author:
Christopher J. Erceg https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Christopher J. Erceg in
Current site
Google Scholar Close
,
Marcin Kolasa
Search for other papers by Marcin Kolasa in
Current site
Google Scholar Close
,
Jesper Lindé https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Jesper Lindé in
Current site
Google Scholar Close
,
Haroon Mumtaz https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Haroon Mumtaz in
Current site
Google Scholar Close
, and
Pawel Zabczyk https://isni.org/isni/0000000404811396 International Monetary Fund

Search for other papers by Pawel Zabczyk in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 073
Language:
English
Publication Date:
29 Mar 2024
DOI:
https://doi.org/10.5089/9798400270864.001
ISBN:
9798400270864
ISSN:
1018-5941
Pages:
55
Keywords:
Monetary Policy; Quantitative Easing; International Spillovers; asset purchase; central bank exit strategies; inflation surge scenario; Policy conduct; appendix E. term premium; open economy; Central bank policy rate; Inflation; Unconventional monetary policies; Bonds; Exchange rate arrangements; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (2.8 MB) Download Epub
We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund