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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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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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  1. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  2. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
  3. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  4. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  5. Rao Aiyagari, S., 1985. "Observational equivalence of the overlapping generations and the discounted dynamic programming frameworks for one-sector growth," Journal of Economic Theory, Elsevier, vol. 35(2), pages 201-221, August.
  6. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  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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Cited by:
  1. 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.
  2. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.
  3. de la Torre, Augusto & Ize, Alain, 2013. "The foundations of macroprudential regulation : a conceptual roadmap," Policy Research Working Paper Series 6575, The World Bank.

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