Working Paper: CEPR ID: DP9153
Authors: Roger E. A. Farmer
Abstract: This paper is about the effectiveness of qualitative easing; a government policy that is designed to mitigate risk through central bank purchases of privately held risky assets and their replacement by government debt, with a return that is guaranteed by the taxpayer. Policies of this kind have recently been carried out by national central banks, backed by implicit guarantees from national treasuries. I construct a general equilibrium model whereagents have rational expectations and there is a complete set of financial securities, but where agents are unable to participate in financial markets that open before they are born. I show that a change in the asset composition of the central bank?s balance sheet will change equilibrium asset prices. Further, I prove that a policy in which the central bank stabilizes fluctuations in the stock market is Pareto improving and is costless to implement.
Keywords: Fiscal policy; Monetary policy; Qualitative easing
JEL Codes: E0; E5; E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Change in the asset composition of the central bank's balance sheet (E52) | Impact on equilibrium asset prices (G19) |
| Stabilizing fluctuations in the stock market (E32) | Pareto improving and costless to implement (D61) |
| Qualitative easing (C54) | Improved welfare without burdening taxpayers (I39) |
| Qualitative easing facilitates trades (F41) | Enhanced resource distribution among agents (D39) |
| Existence of complete insurance markets (D52) | Equilibria where employment, consumption, and real wages differ across states (D59) |