Evaluating Central Banks' Tool Kit: Past, Present, and Future

Eric Sims () and Jing Cynthia Wu

No 26040, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy – quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) – as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the “shadow” Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate.

JEL-codes: E10 E32 E5 E52 E58 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Eric Sims & Jing Cynthia Wu, 2020. "Evaluating Central Banks’ Tool Kit: Past, Present, and Future," Journal of Monetary Economics, .

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Journal Article: Evaluating Central Banks’ tool kit: Past, present, and future (2021)
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