Wei Cui and
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession.
Keywords: monetary policy; large-scale asset purchases; HANK (search for similar items in EconPapers)
JEL-codes: E21 E30 E50 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
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