Misallocation Costs of Digging Deeper into the Central Bank Toolkit
44 Pages Posted: 9 Jul 2021
Date Written: August, 2017
Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms cost of capital. First, we analytically demonstrate the mechanism in a static model. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation effects from corporate bond buys can be large enough to make them less effective than government bond buys, which is not the case without accounting for misallocation effects.
JEL Classification: E22, E51, E52, G21
Suggested Citation: Suggested Citation