Central bank asset purchases : theory and practice

Chapter 1 proposes a novel method for modelling the signalling channel of asset purchases, and integrates this with a stylised portfolio balance model. It then proceeds to identify the signalling channel as responsible for 55% of the GDP response to Quantitative Easing (QE) in the UK, with high uncertainty. While the utility impact of each channel is similar, the signalling channel has a more persistent impact on medium-term consumption and investment. Chapter 2 uses as context a rare natural experiment, the 2022 UK gilt crisis, and develops a DSGE model featuring Non-Bank Financial Institutions to replicate the crisis and policy response. Asset purchases restore market functioning, and their temporary nature is crucial to avoiding a trade-off with monetary policy. Repo loans and macroprudential regulation are viable alternative policies. These results show the central bank can ease financial market stress without loosening monetary policy, delivering its two objectives at all times. Chapter 3 incorporates QE into a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model featuring verlapping Generations (OLG). I find that QE at the ELB is utility-increasing for all ages and cohorts, but the gains are not evenly distributed and depend on the implementation of Quantitative Tightening (QT). With fast QT, the majority of the utility gains accrue to a narrow group aged 60-64, who benefit from both higher wages and wealth effects. With slow QT, most of the gains instead go to younger households via a tighter labour market. In steady state, looser policy benefits younger households at the expense of older households regardless of whether this is implemented through short-term interest rates or through asset purchases.