Working Paper: CEPR ID: DP13100
Authors: Dmitriy Sergeyev; Luigi Iovino
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 evidenceon 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 mortgagepurchases by US government sponsored enterprises.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank balance sheet policies (E58) | asset prices (G19) |
| actions of central banks (E58) | forecast errors (C53) |
| mortgage purchases by GSEs (G21) | conventional mortgage rates (G21) |
| central bank balance sheet policies (E58) | forecast errors (C53) |
| level-k thinking (L20) | effectiveness of balance sheet policies (G32) |
| rational expectations equilibrium (D84) | neutrality of policies (F68) |