Inflation-targeting central banks may impose higher costs on the economy if they shrink their balance sheets too slowly, research by the Bank of England (BoE) finds.

BoE economist Richard Harrison finds central banks allowing only a passive run-off of bonds as they mature may not create enough “headroom” to respond to future shocks. In Harrison’s model, agents recognise this constraint and the economy suffers a deflationary bias, unless the central bank actively sells bonds.

Central banks that