Working Paper: NBER ID: w18421
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 where agents 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: Qualitative Easing; Central Banks; Economic Welfare
JEL Codes: E0; E5; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| qualitative easing (QAE) (C54) | changes in equilibrium asset prices (D53) |
| qualitative easing (QAE) (C54) | improved welfare outcomes (I38) |
| amount of outstanding private debt (F34) | employment (J68) |
| amount of outstanding private debt (F34) | consumption (E21) |
| amount of outstanding private debt (F34) | real wages (J31) |