Working Paper: NBER ID: w21336
Authors: Saroj Bhattarai; Gauti B. Eggertsson; Bulat Gafarov
Abstract: We present a signalling theory of Quantitative Easing (QE) at the zero lower bound on the short term nominal interest rate. QE is effective because it generates a credible signal of low future real interest rates in a time consistent equilibrium. We show these results in two models. One has coordinated monetary and fiscal policy. The other an independent central bank with balance sheet concerns. Numerical experiments show that the signalling effect can be substantial in both models.
Keywords: Quantitative Easing; Government Debt; Signalling Theory; Monetary Policy
JEL Codes: E31; E4; E42; E43; E5; E52; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quantitative Easing (QE) (E51) | lower future short-term interest rates (E43) |
| Quantitative Easing (QE) (E51) | reduce long-term interest rates (E43) |
| reduction in the maturity of government debt (H63) | increased economic activity (F69) |
| lower future short-term interest rates (E43) | stimulate the economy (E65) |
| reduce long-term interest rates (E43) | stimulate economic activity (E65) |
| Quantitative Easing (QE) (E51) | alter expectations of future government behavior (D84) |
| alter expectations of future government behavior (D84) | influence private sector decisions (L52) |
| Quantitative Easing (QE) (E51) | credibly commit to future expansionary policy (E62) |