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Quantitative Easing and Asset Bubbles in a Stock-flow Consistent Framework

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  • Cameron Haas
  • Tai Young-Taft

Abstract

Ever since the Great Recession, central banks have supplemented their traditional policy tool of setting the short-term interest rate with massive buyouts of assets to extend lines of credit and jolt flagging demand. As with many new policies, there have been a range of reactions from economists, with some extolling quantitative easing's expansionary virtues and others fearing it might invariably lead to overvaluation of assets, instigating economic instability and bubble behavior. To investigate these theories, we combine elements of the models in chapters 5, 10, and 11 of Godley and Lavoie's (2007) Monetary Economics with equations for quantitative easing and endogenous bubbles in a new model. By running the model under a variety of parameters, we study the causal links between quantitative easing, asset overvaluation, and macroeconomic performance. Preliminary results suggest that rather than being pro- or countercyclical, quantitative easing acts as a sort of phase shift with respect to time.

Suggested Citation

  • Cameron Haas & Tai Young-Taft, 2017. "Quantitative Easing and Asset Bubbles in a Stock-flow Consistent Framework," Economics Working Paper Archive wp_897, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_897
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    References listed on IDEAS

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    1. Thomas I. Palley, 2011. "Quantitative Easing: A Keynesian Critique," Working Papers wp252, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2018. "On the International Spillovers of US Quantitative Easing," Economic Journal, Royal Economic Society, vol. 128(608), pages 330-377, February.
    3. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    4. James B. Bullard, 2010. "Three lessons for monetary policy from the panic of 2008," Review, Federal Reserve Bank of St. Louis, vol. 92(May), pages 155-163.
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    More about this item

    Keywords

    Quantitative Easing; Stock-flow Consistency; Macroeconomics;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E16 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Social Accounting Matrix
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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