Working Papers

P. Benigno, S. Nisticò: Non-Neutrality of Open-Market Operations

Unconventional open-market operations can have consequences for inflation and out- put because of income losses on central-bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to cover central bank’s losses through appropriate transfers levied as taxes on the private sector. In absence of treasury’s support, large and recurrent central bank’s losses can undermine its long-run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses can be absorbed by future retained earnings without any further consequences on prices. A central bank averse to declin- ing net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. In absence of taxpayers’ support, it is also desirable to increase inflation to the end of reducing the duration of central bank’s losses.

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