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Are QE and Conventional Monetary Policy Substitutable?

Author

Listed:
  • Eric Sims

    (Notre Dame and NBER)

  • Cynthia Wu

    (Notre Dame and NBER)

Abstract

Yes! We study the substitutability between conventional monetary policy based on the adjustment of a short-term policy interest rate with quantitative easing (QE). We do so in a four-equation New Keynesian model featuring financial frictions that allows QE to be economically relevant. We analytically derive how much QE versus conventional policy is necessary to implement an inflation target. Quantitatively, the observed expansion of the Federal Reserve's balance sheet over the zero lower bound (ZLB) period provides stimulus equivalent to cutting the policy rate to 2 percentage points below zero. This is in line with the decline in the empirical shadow federal funds rate series. Moreover, we show that the amount of QE required to achieve price stability depends on the expected duration of the ZLB.

Suggested Citation

  • Eric Sims & Cynthia Wu, 2020. "Are QE and Conventional Monetary Policy Substitutable?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 195-230, February.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:0:a:4
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    Citations

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    Cited by:

    1. Bonciani, Dario & Oh, Joonseok, 2023. "Revisiting the New Keynesian policy paradoxes under QE," European Economic Review, Elsevier, vol. 154(C).
    2. Ricardo J. Caballero & Alp Simsek, 2020. "Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect," NBER Working Papers 27712, National Bureau of Economic Research, Inc.
    3. Böhl, Gregor & Goy, Gavin & Strobel, Felix, 2020. "A structural investigation of quantitative easing," IMFS Working Paper Series 142, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    4. Levieuge, Grégory & Sahuc, Jean-Guillaume, 2021. "Downward interest rate rigidity," European Economic Review, Elsevier, vol. 137(C).
    5. Michael T. Kiley, 2020. "Pandemic Recession Dynamics: The Role of Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound," Finance and Economics Discussion Series 2020-083, Board of Governors of the Federal Reserve System (U.S.).
    6. Callum J. Jones & Mariano Kulish & James Morley, 2021. "A Structural Measure of the Shadow Federal Funds Rate," Finance and Economics Discussion Series 2021-064, Board of Governors of the Federal Reserve System (U.S.).
    7. Vasiliki Dimakopoulou & George Economides & Apostolis Philippopoulos & Vanghelis Vassilatos, 2023. "Can Central Banks Do the Unpleasant Job That Governments Should Do?," CESifo Working Paper Series 10603, CESifo.
    8. Jing Cynthia Wu & Fan Dora Xia, 2020. "Negative interest rate policy and the yield curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(6), pages 653-672, September.
    9. Malliaropulos, Dimitris & Migiakis, Petros, 2023. "A global monetary policy factor in sovereign bond yields," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 445-465.
    10. Cardamone, Dario & Sims, Eric & Wu, Jing Cynthia, 2023. "Wall Street QE vs. Main Street Lending," European Economic Review, Elsevier, vol. 156(C).
    11. Bonciani, Dario & Oh, Joonseok, 2021. "Optimal monetary policy mix at the zero lower bound," Bank of England working papers 945, Bank of England.
    12. Hohberger, Stefan & Ratto, Marco & Vogel, Lukas, 2023. "The macroeconomic effects of unconventional monetary policy: Comparing euro area and US models with shadow rates," Economic Modelling, Elsevier, vol. 127(C).
    13. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    14. Chattopadhyay, Siddhartha, 2020. "Forward guidance and quantitative easing at the Zero Lower Bound," Economics Letters, Elsevier, vol. 197(C).
    15. Andrejs Zlobins, 2021. "On the Time-varying Effects of the ECB's Asset Purchases," Working Papers 2021/02, Latvijas Banka.
    16. Sims, Eric & Wu, Jing Cynthia, 2021. "Evaluating Central Banks’ tool kit: Past, present, and future," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 135-160.
    17. Alexandre Carrier & Kostas Mavromatis, 2024. "Optimal normalization policy under behavioral expectations," Working Papers 800, DNB.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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