Measuring the Effects of Unconventional Monetary Policy Tools under Adaptive Learning

Stephen Cole and Sungjun Huh

No 2023-05, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: We compare the economic effects of forward guidance and quantitative easing utilizing the four-equation New Keynesian model of Sims, Wu, and Zhang (2023) with agents forming expectations via an adaptive learning rule. The results indicate forward guidance can have a greater influence on macroeconomic variables compared to quantitative easing, suggesting that forward guidance may have contributed to the high inflation rate after the COVID-19 related recession. Adaptive learning agents estimate a higher effect of forward guidance on the economy leading to a greater impact on expectations, and thus, contemporaneous inflation. However, the performance gap between forward guidance and quantitative easing can change. If quantitative easing includes anticipated shocks, more households finance consumption through long-term borrowing, and the central bank provides a greater percentage of liquidity in the long-term borrowing market, the performance of quantitative easing can increase, and at times, outperform forward guidance.

Keywords: unconvetional monetary policy; QE; LSAP; forward guidance; adaptive learning (search for similar items in EconPapers)
JEL-codes: D83 E32 E52 E58 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mrq:wpaper:2023-05

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