Misallocation Costs of Digging Deeper into the Central Bank Toolkit

Abstract

Central bank large-scale asset purchases, such as the purchase of securities of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firm cost of capital. First, we analytically demonstrate the mechanism in a two-period model. We then evaluate the misallocation of resources induced by corporate security purchases and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation effects from corporate security purchases can be large enough to make them less effective in increasing output than government bond buys.

Keywords: QE, LSAPs, and Misallocation

JEL Classification: E22, E51, E52, G21