Monetary Policy and Quantitative Easing in an Open Economy: Prices, Exchange Rates and Risk Premia

Under Quantitative Easing, Open Market Operations involve arbitrary portfolios of assets and not exclusively nominally risk free bonds held with a specic target composition. In a simple stochastic cash-inadvance model of a large open economy, quantitative easing inhibits the ability of the central bank to control the path of prices and exchange rates. This is the case even with non-Ricardian scal policy. Alternative modes of conduct of monetary policy have measurable implications. A nancial stability target, where the central bank trades only in nominally risk free bonds, implies that the risk premium is positively correlated with future interest rates. A price stability, or ination, target induces the same correlation, while a monetary sta