Evaluating Central Banks' Tool Kit: Past, Present, and Future

57 Pages Posted: 5 Mar 2019 Last revised: 23 May 2019

See all articles by Eric R. Sims

Eric R. Sims

University of Michigan at Ann Arbor; University of Notre Dame - Department of Economics

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2019

Abstract

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

Suggested Citation

Sims, Eric R. and Wu, Jing Cynthia, Evaluating Central Banks' Tool Kit: Past, Present, and Future (February 28, 2019). Available at SSRN: https://ssrn.com/abstract=3344490 or http://dx.doi.org/10.2139/ssrn.3344490

Eric R. Sims

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
102
Abstract Views
1,164
rank
253,275
PlumX Metrics