Effectiveness and Addictiveness of Quantitative Easing

40 Pages Posted: 29 Jun 2020 Last revised: 16 Aug 2020

See all articles by Peter Karadi

Peter Karadi

European Central Bank (ECB)

Anton Nakov

CEPR; European Central Bank (ECB)

Date Written: June 2020

Abstract

This paper analyses optimal asset-purchase policies in a macroeconomic model with banks, which face occasionally-binding balance-sheet constraints. It proves analytically that asset-purchase policies are effective in offsetting large financial disturbances, which impair banks' capital position. It warns, however, that the policy is addictive because it flattens the yield curve, reduces the profitability of the banking sector and therefore slows down its recapitalization. Consequently, optimal exit from large central bank balance sheets is gradual.

Keywords: Balance-Sheet-Constrained Banks, Large-scale asset purchases

JEL Classification: E32, E44, E52

Suggested Citation

Karadi, Peter and Nakov, Anton A., Effectiveness and Addictiveness of Quantitative Easing (June 2020). CEPR Discussion Paper No. DP14951, Available at SSRN: https://ssrn.com/abstract=3638056

Peter Karadi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Anton A. Nakov

CEPR ( email )

London
United Kingdom

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
222
PlumX Metrics