Evaluating Central Banks' Tool Kit: Past, Present, and Future

Sims, Eric R.; Wu, Jing Cynthia

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Evaluating Central Banks' Tool Kit: Past, Present, and Future

NBER Working Paper No. w26040

59 Pages Posted: 9 Jul 2019 Last revised: 25 Feb 2026

See all articles by Eric R. Sims

Eric R. Sims

University of Michigan at Ann Arbor; University of Notre Dame - Department of Economics

Jing Cynthia Wu

The University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

There are 2 versions of this paper

Date Written: July 2019

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.

Suggested Citation: Suggested Citation

Sims, Eric R. and Wu, Jing Cynthia, Evaluating Central Banks' Tool Kit: Past, Present, and Future (July 2019). NBER Working Paper No. w26040, Available at SSRN: https://ssrn.com/abstract=3416343