Working Paper: NBER ID: w22135
Authors: Roger Farmer; Pawel Zabczyk
Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
Keywords: qualitative easing; unconventional monetary policy; central bank; asset prices; economic stability
JEL Codes: E02; E6; G11; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| qualitative easing (C54) | changes in risk composition (G52) |
| changes in risk composition (G52) | altered equilibrium asset prices (D53) |
| altered equilibrium asset prices (D53) | economic welfare (D69) |
| qualitative easing (C54) | asset price stabilization (E44) |
| qualitative easing (C54) | enhanced welfare outcomes (I38) |
| central bank stabilizes stock market volatility (E63) | returns on stocks equal those of one-period real government bonds (G12) |
| qualitative easing (C54) | market stability (D53) |
| qualitative easing (C54) | redistribution of resources among agents (D30) |