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Integrating balance sheet policy into monetary policy conditions This paper introduces a new Monetary Policy Condition Index (MCI) that integrates conventional and unconventional monetary policy tools into a unified measure. The MCI is a weighted average of short-term interest rate and central bank balance sheet size, improving upon the shadow rate by capturing balance sheet policy effects away from the effective lower bound. We estimate the MCI's weight and its dynamic relationships with output, inflation and financial conditions using a Bayesian Vector Autoregression (BVAR) framework. Results suggest that large balance sheet policies have exerted a significant accommodative influence on monetary policy conditions, including away from the effective lower bound. Through historical decomposition and counterfactual exercises, the MCI provides new insights into unconventional policy's effectiveness and unintended consequences. The framework can flexibly accommodate numerous extensions, including possibly higher neutral balance sheet under ample reserve system.

A new monetary policy conditions index integrates both conventional and unconventional policy tools. It consistently measures #MonetaryPolicy over time and across regimes, capturing the role of #BalanceSheets even beyond the effective lower bound.

www.bis.org/publ/work128...

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