Unwinding quantitative easing: State dependency and household heterogeneity

Cristiano Cantore and Pascal Meichtry

European Economic Review, 2024, vol. 170, issue C

Abstract: This paper studies the asymmetry in the macroeconomic effects of central bank asset market operations induced by state dependency and the associated role of household heterogeneity. We build a New Keynesian model with borrowers and savers in which quantitative easing and tightening operate through portfolio rebalancing between short-term and long-term government bonds. We highlight the significance of an occasionally binding zero lower bound in explaining a weaker aggregate impact of asset sales relative to asset purchases. In this context, when close to the lower bound, raising the nominal interest rate prior to unwinding quantitative easing mitigates the economic costs of monetary policy normalization. Furthermore, our results imply that household heterogeneity in combination with state dependency amplifies the revealed asymmetry, while household heterogeneity alone does not enhance the aggregate effects of asset market operations.

Keywords: Unconventional monetary policy; Quantitative tightening; Quantitative easing; Heterogeneous agents; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 E58 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Unwinding Quantitative Easing: State Dependency and Household Heterogeneity (2024)
Working Paper: Unwinding quantitative easing: state dependency and household heterogeneity (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:170:y:2024:i:c:s0014292124001946

DOI: 10.1016/j.euroecorev.2024.104865

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