Quantitative Easing and the 'New Normal' in Monetary Policy

40 Pages Posted: 22 Jan 2018

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: 2018-01-17


Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.

Keywords: Interest rates, Macroeconomic models, Monetary policy

JEL Classification: E52, E47, E37

Suggested Citation

Kiley, Michael T., Quantitative Easing and the 'New Normal' in Monetary Policy (2018-01-17). FEDS Working Paper No. 2018-004. Available at SSRN: https://ssrn.com/abstract=3105855 or http://dx.doi.org/10.17016/FEDS.2018.004

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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