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Quantitative Easing and the ‘New Normal’ in Monetary Policy
Author(s) -
Kiley Michael T.
Publication year - 2018
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12238
Subject(s) - quantitative easing , interest rate , economics , monetary policy , nominal interest rate , monetary economics , offset (computer science) , zero lower bound , forward guidance , inflation (cosmology) , real interest rate , inflation targeting , macroeconomics , econometrics , central bank , credit channel , computer science , programming language , physics , theoretical physics
Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long‐term interest rates, may complement policy approaches focused on adjustments in short‐term interest rates. Simulation results using a large‐scale model (FRB/US) suggest that QE does not improve economic performance if the steady‐state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short‐term interest rates as the primary tool.