The Power of Quantitative Easing Revisited

Abstract

I theoretically investigate the macroeconomic impact of quantitative easing (QE) using a heterogeneous-agent New Keynesian (HANK) model which incorporates the preferred habitat theory. In contrast to existing studies, my simulation supposes a more realistic situation in which the central bank announces the future asset purchase strategy in advance. I find that if the announcement effect is also considered, the power of QE is weaker in the HANK model than in the representative-agent model. Furthermore, excessive extension of QE has a contractionary effect on the economy. Precautionary saving due to idiosyncratic income risk and redistribution resulting from low long-term yield play a key role in these results.

Keywords: Quantitative easing, Unconventional monetary policy, Heterogeneous-agent model

JEL Classification: E44, E52, E58