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The Macroeconomic Effects of Large‐scale Asset Purchase Programmes

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  • Han Chen
  • Vasco Cúrdia
  • Andrea Ferrero

Abstract

The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the US Federal Reserve second Large-Scale Asset Purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on US data. Our simulations suggest that such a program increases GDP growth by less than half of a percentage point relative to the absence of intervention, but has a very persistent effect on the level of GDP. The marginal contribution of the asset purchase program to inflation is very small. One key reason behind our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, we find a substantially smaller semi-elasticity of the risk premium to the amount of debt in the hands of the private sector than the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 122 (2012)
Issue (Month): 564 (November)
Pages: F289-F315

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Handle: RePEc:ecj:econjl:v:122:y:2012:i:564:p:f289-f315

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References

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  1. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2," 2011 Meeting Papers 982, Society for Economic Dynamics.
  2. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
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  4. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  5. Jules H. van Binsbergen & Jesús Fernández-Villaverde & Ralph S.J. Koijen & Juan F. Rubio-Ramírez, 2010. "The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences," PIER Working Paper Archive 10-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
  7. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
  8. Vasco Curdia & Andrea Ferrero & Han Chen, 2012. "The Macroeconomic Effects of Large-Scale Asset Purchase Programs," 2012 Meeting Papers 372, Society for Economic Dynamics.
  9. Bruce Preston & Stefano Eusepi, 2011. "The maturity structure of debt, monetary policy and expectations stabilization," 2011 Meeting Papers 1287, Society for Economic Dynamics.
  10. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
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  12. Robert E. Hall, 2011. "The Long Slump," NBER Working Papers 16741, National Bureau of Economic Research, Inc.
  13. Vasco Curdia & Michael Woodford, 2010. "The Central-Bank Balance Sheet as an Instrument of Monetary Policy," NBER Working Papers 16208, National Bureau of Economic Research, Inc.
  14. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
  15. Kapetanios, George & Mumtaz, Haroon & Stevens, Ibrahim & Theodoridis, Konstantinos, 2012. "Assessing the economy-wide effects of quantitative easing," Bank of England working papers 443, Bank of England.
  16. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Staff Reports 322, Federal Reserve Bank of New York.
  17. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  18. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  19. Harrison, Richard, 2012. "Asset purchase policy at the effective lower bound for interest rates," Bank of England working papers 444, Bank of England.
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  1. The macroeconomic effects of large-scale asset purchase programs
    by Christian Zimmermann in NEP-DGE blog on 2012-11-24 15:49:16

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  1. > Macroeconomics > Monetary Theory
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