Quantitative Easing and the “New Normal” in Monetary Policy

Michael Kiley

No 2018-004, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.

Keywords: Interest rates; Macroeconomic models; Monetary policy (search for similar items in EconPapers)
JEL-codes: E37 E47 E52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-01-17
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2018004pap.pdf (application/pdf)

Related works:
Journal Article: Quantitative Easing and the ‘New Normal’ in Monetary Policy (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-04

DOI: 10.17016/FEDS.2018.004

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().