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This paper analyses central bank balance sheet policies in a framework with banks facing occasionally-binding leverage constraints and endogenous disruptions in financial intermediation. Whilst balance sheet policies are effective in alleviating negative effects of financial stress episodes, they increase the probability of such episodes occurring and increase their duration. Moreover, balance sheet policies are found to be effective in mitigating negative implication of financial stress on economic activity in a tightening cycle but come at a cost to price stability.
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