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

Christopher Waller and Paola Boel
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Paola Boel: Sveriges Riksbank

No 1030, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, in this environment, not all agents are satiated at the zero lower bound even when the Friedman rule is the best interest rate policy the central bank can implement. Therefore, there is scope for central bank policies of liquidity provision even at the zero lower bound. This is because such policies temporarily relax the liquidity constraint of impatient agents without harming the patient ones, thus improving welfare. Due to a pricing externality, this may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances.

Date: 2017
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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Related works:
Working Paper: On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2015)
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:red:sed017:1030

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