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Quantitative Easing without Rational Expectations

Dmitriy Sergeyev and Luigi Iovino

No 1387, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effects of risky assets purchases financed by issuance of riskless debt by the government (quantitative easing) in a model with nominal frictions but without rational expectations. We use the concept of reflective equilibrium that converges to the rational expectations equilibrium in the limit. This equilibrium notion rationalizes the idea that it is difficult to change expectations about economic outcomes even if it is easy to shift expectations about the policy. Without additional assumptions about non-pecuniary demand for safe assets or segmentation of assets markets, we find that in the reflective equilibrium quantitative easing policy increases the price of risky assets and stimulates output, while it is neutral in the rational expectations equilibrium.

Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1387

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