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

Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian. Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with unconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets

The taxation of trades in assets

When the asset market is incomplete, there typically exist taxes on trades in assets and a redistribution of revenue in the asset market that are Pareto improving. The policy is anonymous, it economizes on complexity, and it results in ex post Pareto optimal allocations; it is publicly announced before markets open, thus fully and correctly anticipated by traders, it does not require that financial markets be shut down, and it does not modify the asset market structure. As such, it improves over previously proposed constrained interventions.taxes, incomplete asset market, equilibrium, Pareto improvement