Revisiting the New Keynesian policy paradoxes under QE

Dario Bonciani and Joonseok Oh

European Economic Review, 2023, vol. 154, issue C

Abstract: Standard New Keynesian models deliver puzzling results at the effective lower bound of short-term interest rates: greater price flexibility amplifies the fall in the output gap in response to adverse demand shocks; labour tax cuts are contractionary; the multiplier of wasteful government spending is large. These outcomes stem from a failure to characterise monetary policy correctly. Both analytically and numerically, we show that allowing the central bank to respond to inflation with quantitative easing can resolve all these paradoxes. In quantitative terms, mild adjustments to the central bank’s balance sheet are sufficient to obtain results more in line with conventional wisdom.

Keywords: Policy paradoxes; Unconventional monetary policy; Quantitative easing; Liquidity trap; Effective lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 E63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:154:y:2023:i:c:s0014292123000582

DOI: 10.1016/j.euroecorev.2023.104429

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