On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound

Paola Boel and Christopher Waller

No 2015-027, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We construct a monetary economy in which agents face aggregate demand shocks and hetero- generous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy, not all agents are satiated at the zero lower bound. Thus, quantitative easing can be welfare improving since it temporarily relaxes the liquidity constraint of some agents, without harming others. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the unconstrained agents. Lastly, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt.

Keywords: Money; Heterogeneity; Stabilization Policy; Zero Lower Bound; Quantitative Easing (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2015-09-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

Published in International Economic Review

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Related works:
Working Paper: On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2017)
Working Paper: On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2015)
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DOI: 10.20955/wp.2015.027

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