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Qualitative Easing: How it Works and Why it Matters

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  • Roger E.A. Farmer

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18421.

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Date of creation: Sep 2012
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Handle: RePEc:nbr:nberwo:18421

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Blog mentions

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  1. The end of central banking as we knew it
    by Economic Logician in Economic Logic on 2012-10-17 14:49:00
  2. 10 Thursday PM Reads
    by Barry Ritholtz in The Big Picture on 2012-10-18 20:30:34

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