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Optimal Policy Rules at Home, Crisis and Quantitative Easing Abroad

29 Pages Posted: 1 Nov 2016  

Paul D. McNelis

Gabelli School of Business, Fordham University

Date Written: 2016

Abstract

This paper examines the international transmission of financial shocks which originate in, and are partially offset by, quantitative easing in a large financially-stressed country. Using a two-country model, we evaluate the adjustment in the non-stressed home country, following recurring negative shocks to productivity and banking-sector balance-sheet/terminal wealth ratios. We first examine the application of QE policies in the stressed foreign country. Coupling quantitative easing with crisis events abroad magnifies the financial instability transmitted to the rest of the world. Our results show that the non-stressed home country can make effective use of tax-rate rules for consumption, or taxes to stabilize financial-sector net worth in times of prolonged crisis abroad.

Keywords: quantitative easing, financial frictions, unconventional monetary policy

JEL Classification: E44, E58, F38, F41

Suggested Citation

McNelis, Paul D., Optimal Policy Rules at Home, Crisis and Quantitative Easing Abroad (2016). BOFIT Discussion Paper No. 15/2016; Gabelli School of Business, Fordham University Research Paper No. 2862363. Available at SSRN: https://ssrn.com/abstract=2862363

Paul D. McNelis (Contact Author)

Gabelli School of Business, Fordham University ( email )

113 West 60th Street
Bronx, NY 10458
United States

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