Macroeconomic Effectiveness of Non-Standard Monetary Policy and Early Exit. A Model-Based Evaluation

50 Pages Posted: 10 Nov 2016  

Lorenzo Burlon

Bank of Italy

Andrea Gerali

Bank of Italy

Alessandro Notarpietro

Bank of Italy

Massimiliano Pisani

Bank of Italy

Date Written: July 21, 2016

Abstract

This paper evaluates the macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative strategies as regards (i) the unwinding of asset positions accumulated under the APP and (ii) communication of current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area. Our results are as follows. First, as the monetary authority brings forward the selling of long-term sovereign bonds, the stimulus from the APP on inflation and economic activity is correspondingly reduced. In particular, if the bonds are sold immediately after purchases end, the impact on inflation is negligible. Second, if the monetary authority communicates that it will hold the policy rate constant for one year instead of two, the APP is less effective, and the inflation increase is halved. Third, the subdued impact of the APP associated with an early exit from the programme delays the return to a standard monetary policy regime.

Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound

JEL Classification: E43, E52, E58

Suggested Citation

Burlon, Lorenzo and Gerali, Andrea and Notarpietro, Alessandro and Pisani, Massimiliano, Macroeconomic Effectiveness of Non-Standard Monetary Policy and Early Exit. A Model-Based Evaluation (July 21, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1074. Available at SSRN: https://ssrn.com/abstract=2867441 or http://dx.doi.org/10.2139/ssrn.2867441

Lorenzo Burlon

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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