Monetary Policy at the Zero Lower Bound and After: A Reassessment of Quantitative Easing and Critique of the Federal Reserve's Proposed Exit Strategy

This paper analyses quantitative easing, focusing on its implicit fiscal dimension. It distinguishes between ‘weak’ and ‘strong’ zero lower bound traps. A strong trap corresponds to the liquidity trap. In a weak trap QE is expansionary but subject to diminishing returns. QE implicitly transfers income streams to the fiscal authority, generating fiscal drag that can eventually render QE contractionary. Proposals to exit QE by paying interest on reserves to check inflationary pressures is contradicted because paying interest constitutes an implicit tax cut. Instead, the paper suggests implementing asset based reserve requirements that deactivate liquidity by requiring banks hold increased reserves.