Effectiveness and addictiveness of quantitative easing

Peter Karadi and Anton Nakov

Journal of Monetary Economics, 2021, vol. 117, issue C, 1096-1117

Abstract: This paper analyzes optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks’ capital position. It warns, however, that the policy can remain ineffective after non-financial shocks and might offer no substitute for interest rate policy when the latter is constrained by the lower bound. Furthermore, the asset-purchase policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector, and therefore slows down its recapitalization. Consequently, the optimal exit from large central bank balance sheets is gradual.

Keywords: Large-scale asset purchases; Balance-Sheet-Constrained banks (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Working Paper: Effectiveness and Addictiveness of Quantitative Easing (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:1096-1117

DOI: 10.1016/j.jmoneco.2020.09.002

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