Working Paper: NBER ID: w27295
Authors: Eric R. Sims; Jing Cynthia Wu
Abstract: The Federal Reserve has reacted swiftly to the COVID-19 pandemic. It has resuscitated many of its programs from the last crisis by lending to the financial sector, which we refer to as “Wall Street QE.” The Fed is now proposing to also lend directly to, and purchase debt directly from, non-financial firms, which we label “Main Street QE.” Our paper develops a new framework to compare and contrast these different policies. In a situation in which financial intermediary balance sheets are impaired, such as the Great Recession, Main Street and Wall Street QE are perfect substitutes and both stimulate aggregate demand. In contrast, for situations like the one we are now facing due to COVID-19, where the production sector is facing significant cash flow shortages, Wall Street QE becomes almost completely ineffective, whereas Main Street QE can be highly stimulative.
Keywords: No keywords provided
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wall Street QE (G19) | aggregate demand (E00) |
| Main Street QE (E49) | aggregate demand (E00) |
| cash flow constraint binding on nonfinancial firms (G32) | Wall Street QE becomes ineffective (G19) |
| Main Street QE (E49) | investment (G31) |
| Main Street QE (E49) | labor (J89) |
| Main Street QE (E49) | consumption (E21) |
| Wall Street QE (G19) | economic variables (P42) |