Effectiveness and Addictiveness of Quantitative Easing
40 Pages Posted: 29 Jun 2020 Last revised: 16 Aug 2020
Date Written: June 2020
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: Suggested Citation