Working Paper: NBER ID: w26040
Authors: Eric R. Sims; Jing Cynthia Wu
Abstract: We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy – quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) – as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the “shadow” Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate.
Keywords: quantitative easing; negative interest rate policy; forward guidance
JEL Codes: E10; E32; E5; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NIRP (E43) | output (C67) |
| FG (F23) | output (C67) |
| NIRP and FG must be twice as large as conventional policy shock (E19) | output (C67) |
| QE (E01) | output (C67) |
| NIRP (E43) | net worth of financial intermediaries (G29) |
| NIRP (E43) | effectiveness of NIRP (E43) |
| Normalization of central bank's balance sheet after QE (E52) | future economic performance (P17) |