Evaluating Central Banks' Tool Kit: Past, Present, and Future
62 Pages Posted: 5 Mar 2019 Last revised: 2 Apr 2020
Date Written: February 28, 2019
We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy -- quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) -- as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the "shadow" Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate.
Keywords: zero lower bound, unconventional monetary policy, quantitative easing, negative interest rate policy, forward guidance,quantitative tightening, DSGE, Great Recession, effective lower bound
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