What are the effects of central bank balance sheet expansion, and should we worry about central bank losses? Using a Heterogeneous Agent New Keynesian model incorporating money in utility and an endogenous zero lower bound (ZLB), we study the fiscal-monetary interaction of central bank balance sheet policies. We find that the overall efficiency of QE and QT policies depends on the combination of the expected future size of the balance sheet and the fiscal transmission of central bank losses. First, permanent balance sheet expansions stimulate the economy in the long-run and, by anticipation, increase inflation and output during the ZLB episode, as they interact with distortionary taxes and imperfect capital markets. Second, at the end of the ZLB, the central bank incurs losses: issuing securities to offset these losses is more welfare-enhancing than raising taxes.
What have been the effects of quantitative easing in Europe since 2008, and would helicopter money have been a better way to allocate the new money created? Since only a fraction of households holds assets, and since their marginal propensity to consume is quite low, the assets purchase program by the European Central Bank may be less efficient than a direct transfer of money to all households, i.e. helicopter money. Using a Two-Agent New-Keynesian (TANK) model, we simulate the QE program in Europe between 2009 and 2019, and find that this policy had sizable effects on inflation, consumption and output, but that helicopter money would have been more efficient, while reducing inequalities during this period.
