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Quantitative easing

Cui, Wei and Sterk, Vincent (2018) Quantitative easing. CFM Discussion Paper Series (CFM-DP2018-30). Centre For Macroeconomics, London, UK.

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Abstract

Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Discussio...
Additional Information: © 2018 CFM
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 28 Nov 2018 14:49
Last Modified: 30 Jan 2019 12:42
Funders: Economic & Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/90874

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