Working Paper: CEPR ID: DP13322
Authors: Vincent Sterk; Wei Cui
Abstract: Abstract 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
JEL Codes: E21; E30; E50; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quantitative Easing (QE) (E51) | Aggregate Demand (E00) |
| Quantitative Easing (QE) (E51) | Proportion of Liquid Wealth held by Households (G59) |
| Proportion of Liquid Wealth held by Households (G59) | Aggregate Demand (E00) |
| Difference in Marginal Propensities to Consume (MPCs) from Liquid vs. Illiquid Wealth (E21) | QE Effectiveness (C54) |
| Quantitative Easing (QE) (E51) | Output and Inflation (E31) |
| Aggressive Quantitative Easing Policies (C54) | Inequality (D63) |
| Inequality (D63) | Welfare Losses (D69) |
| Quantitative Easing (QE) (E51) | Real Reserve Targeting (RRT) Optimality (E52) |