On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound

Paola Boel () and Christopher Waller
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Paola Boel: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 310, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We construct a monetary economy in which agents face aggregate demand shocks and hetero- geneous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy the central bank can implement, not all agents are satiated at the zero lower bound and therefore there is scope for central bank policies of liquidity provision. Indeed, we find that quantitative easing can be welfare improving even at the zero lower bound. This is because such policy temporarily relaxes the liquidity constraint of impatient agents, without harming the patient ones. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances. Last, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt.

Keywords: Money; Heterogeneity; Stabilization Policy; Zero Lower Bound; Quantitative Easing (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-09-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2017)
Working Paper: On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0310

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