Misallocation Costs of Digging Deeper into the Central Bank Toolkit

FEDS Working Paper No. 2017-076

70 Pages Posted: 20 Sep 2017 Last revised: 24 Dec 2019

See all articles by Robert J. Kurtzman

Robert J. Kurtzman

Board of Governors of the Federal Reserve System

David Zeke

University of Southern California - Department of Economics

Date Written: December 23, 2019

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

Suggested Citation

Kurtzman, Robert J. and Zeke, David, Misallocation Costs of Digging Deeper into the Central Bank Toolkit (December 23, 2019). FEDS Working Paper No. 2017-076, Available at SSRN: https://ssrn.com/abstract=3039699 or http://dx.doi.org/10.2139/ssrn.3039699

Robert J. Kurtzman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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David Zeke

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

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