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Macroeconomic effects of an open-ended Asset Purchase Programme

Lorenzo Burlon (), Alessandro Notarpietro () and Massimiliano Pisani ()

No 1185, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper we evaluate the effectiveness of an open-ended Asset Purchase Programme (APP) for the euro area. To this purpose, we build on the large-scale New Keynesian dynamic general equilibrium model calibrated to the euro area and the rest of the world developed in Burlon et al. (2017), but, different from that contribution, we assume that the central bank does not announce the ending date of the programme, while leaving open the possibility of extending it in future periods conditionally on inflation developments. We assume that agents form their expectations about possible additional purchases beyond the horizon of the announcement by the central bank according to a rule linking them to the expected inflation gap. It is showed that the open-ended APP is more effective in immediately stimulating macroeconomic conditions than committing ex ante to an ending date. Importantly, the open-ended dimension provides a hedge against the materialization of negative euro-area aggregate demand shocks that pushes inflation away from its path towards the target. The effectiveness is further reinforced by a forward guidance on monetary policy rates.

Keywords: central bank communication; open-ended announcement; non-standard monetary policy; DSGE models; open-economy macroeconomics; euro area (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
Date: 2018-07
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