Are QE and Conventional Monetary Policy Substitutable?

35 Pages Posted: 13 Jan 2020

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)

Date Written: September 27, 2019

Abstract

Yes! We study the substitutability between conventional monetary policy based on the adjustment of a short term policy interest rate with quantitative easing (QE). We do so in a four equation New Keynesian model featuring financial frictions that allows QE to be economically relevant. We analytically derive how much QE vs conventional policy is necessary to implement an inflation target. Quantitatively, the observed expansion of the Federal Reserve’s balance sheet over the zero lower bound (ZLB) period provides stimulus equivalent to cutting the policy rate to two percentage points below zero. This is in-line with the decline in the empirical shadow Federal Funds rate series. Moreover, we show that the amount of QE required to achieve price stability depends on the expected duration of the ZLB.

Suggested Citation

Sims, Eric R. and Wu, Jing Cynthia, Are QE and Conventional Monetary Policy Substitutable? (September 27, 2019). Available at SSRN: https://ssrn.com/abstract=3506322 or http://dx.doi.org/10.2139/ssrn.3506322

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

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