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Quantitative Easing in an Endogenous Growth Model

Parantap Basu

No 2014_01, CEGAP Working Papers from Durham University Business School

Abstract: A remarkable feature of the current great recession is an upward shift in the trend of the proportion of households leaving the labour force due to schooling. Using an endogenous growth model with agent’s time allocation between work, leisure and schooling, I argue that the quantitative easing might have contributed to this upward trend in addition to a decline in TFP. Although a growing literature analyzes the macroeconomic effects of the present quantitative easing (QE), little efforts have been directed to understand the effects of this QE on households’ time allocation between various activities and the consequent labour force participation decision. I show that QE is an unconventional disinflationary way of generating seigniorage revenue which imposes an adverse wealth effect on the household. In response, to this negative wealth shock, households reduce their leisure time. If the government spends seigniorage revenue on TFP enhancing projects such as education, agents will divert the freed up time more to schooling and drop out from the labour force. A Bayesian estimation of my DSGE endogenous growth model with the US data lends support to the model predictions.

Date: 2014-03
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