Qualitative Easing: How it Works and Why it Matters
AbstractThis paper is about the effectiveness of qualitative easing; a government policy that is designed to mitigate risk through central bank purchases of privately held risky assets and their replacement by government debt, with a return that is guaranteed by the taxpayer. Policies of this kind have recently been carried out by national central banks, backed by implicit guarantees from national treasuries. I construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where agents are unable to participate in financial markets that open before they are born. I show that a change in the asset composition of the central bank’s balance sheet will change equilibrium asset prices. Further, I prove that a policy in which the central bank stabilizes fluctuations in the stock market is Pareto improving and is costless to implement.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9153.
Date of creation: Sep 2012
Date of revision:
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Other versions of this item:
- Roger E.A. Farmer, 2012. "Qualitative Easing: How it Works and Why it Matters," NBER Working Papers 18421, National Bureau of Economic Research, Inc.
- E0 - Macroeconomics and Monetary Economics - - General
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-DGE-2012-10-13 (Dynamic General Equilibrium)
- NEP-MAC-2012-10-13 (Macroeconomics)
- NEP-MON-2012-10-13 (Monetary Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The end of central banking as we knew it
by Economic Logician in Economic Logic on 2012-10-17 14:49:00
- 10 Thursday PM Reads
by Barry Ritholtz in The Big Picture on 2012-10-18 20:30:34
- de la Torre, Augusto & Ize, Alain, 2013. "The foundations of macroprudential regulation : a conceptual roadmap," Policy Research Working Paper Series 6575, The World Bank.
- Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.
- de la Torre, Augusto & Ize, Alain, 2013. "The rhyme and reason for macroprudential policy : four guideposts to find your bearings," Policy Research Working Paper Series 6576, The World Bank.
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