On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound

37 Pages Posted: 6 Oct 2015 Last revised: 3 Jan 2019

See all articles by Paola Boel

Paola Boel

Sveriges Riksbank - Research Division

Christopher J. Waller

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Notre Dame - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2015-09-01

Abstract

We construct a monetary economy in which agents face aggregate demand shocks and hetero- generous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy, not all agents are satiated at the zero lower bound. Thus, quantitative easing can be welfare improving since it temporarily relaxes the liquidity constraint of some agents, without harming others. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the unconstrained agents. Lastly, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt.

Keywords: Money, Heterogeneity, Stabilization Policy, Zero Lower Bound, Quantitative Easing

JEL Classification: E40, E50

Suggested Citation

Boel, Paola and Waller, Christopher J., On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound (2015-09-01). FRB St. Louis Working Paper No. 2015-27. Available at SSRN: https://ssrn.com/abstract=2669859

Paola Boel (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Christopher J. Waller

Federal Reserve Banks - Federal Reserve Bank of St. Louis

411 Locust St
Saint Louis, MO 63011
United States

University of Notre Dame - Department of Economics ( email )

434 Flanner Hall
Notre Dame, IN 46556
United States
574-631-4963 (Phone)
574-631-9238 (Fax)

HOME PAGE: http://www.nd.edu/~cwaller/

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