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

Riksbank Research Paper Series No. 134

Sveriges Riksbank Working Paper Series No. 310

38 Pages Posted: 18 May 2016

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: September 2015

Abstract

We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy the central bank can implement, not all agents are satiated at the zero lower bound and therefore there is scope for central bank policies of liquidity provision. Indeed, we find that quantitative easing can be welfare improving even at the zero lower bound. This is because such policy temporarily relaxes the liquidity constraint of impatient agents, without harming the patient ones. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances. Last, 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 (September 2015). Riksbank Research Paper Series No. 134. Available at SSRN: https://ssrn.com/abstract=2780360 or http://dx.doi.org/10.2139/ssrn.2780360

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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