Central Bank Balance Sheet Policies Without Rational Expectations

Dmitriy Sergeyev and Luigi Iovino

No 13100, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the effects of central bank balance sheet policies—namely, quantitative easing and foreign exchange interventions—in a model where people form expectations through the level-k thinking process, which is consistent with experimental evidence on the behavior of people in strategic environments. We emphasize two main theoretical results. First, under a broad set of conditions, central bank interventions are effective under level-k thinking, while they are neutral in the rational expectations equilibrium. Second, forecast errors about future endogenous variables are predictable by balance sheet interventions. We confirm these predictions using data on mortgage purchases by US government sponsored enterprises.

Keywords: Quantitative easing; Foreign exchange interventions; Level-k thinking (search for similar items in EconPapers)
JEL-codes: E5 F3 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (35)

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