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When is Quantitative Easing effective?

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  • Markus Hoermann

    (TU Dortmund University)

  • Andreas Schabert

    (University of Amsterdam, and TU Dortmund University)

Abstract

We present a simple macroeconomic model with open market operations that allows examining the effects of quantitative and credit easing. The central bank controls the policy rate, i.e. the price of money in open market operations, as well as the amount and the type of assets that are accepted as collateral for money. When the policy rate is sufficiently low, this set-up gives rise to an (il-)liquidity premium on non-eligible assets. Then, a quantitative easing policy, which increases the size of the central bank's balance sheet, can increase real activity and prices, while a credit easing policy, which changes the composition of the balance sheet, can lower interest rate spreads, stimulate real activity, and reduce prices. The effectiveness of quantitative and credit easing is however limited to the extent that eligible assets are scarce. Nevertheless, they can help escaping from the zero lower bound.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-001/2/DSF 6.

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Date of creation: 04 Jan 2011
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Handle: RePEc:dgr:uvatin:20110001

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Web page: http://www.tinbergen.nl

Related research

Keywords: Monetary policy; collateralized lending; quantitative easing; credit easing; liquidity premium; zero lower bound;

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the U.S. Business Cycle," NBER Working Papers 10724, National Bureau of Economic Research, Inc.
  2. Nobuhiro Kiyotaki & Gauti Eggertsson & Andrea Ferrero & Marco Del Negro, 2010. "The Great Escape? A Quantitative Evaluation of the Fed’s Non-Standard Policies," 2010 Meeting Papers 113, Society for Economic Dynamics.
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