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Evaluating Quantitative Easing: A DSGE Approach

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  • Falagiarda, Matteo

Abstract

This paper develops a simple Dynamic Stochastic General Equilibrium (DSGE) model capable of evaluating the effect of large purchases of treasuries by central banks. The model exhibits imperfect asset substitutability between government bonds of different maturities and a feedback from the term structure to the macroeconomy. Both are generated through the introduction of portfolio adjustment frictions. As a result, the model is able to isolate the portfolio rebalancing channel of Quantitative Easing (QE). This theoretical framework is employed to evaluate the impact on yields and the macroeconomy of large purchases of medium- and long-term treasuries recently carried out in the US and UK. The results from the calibrated model suggest that large asset purchases of government assets had stimulating effects in terms of lower long-term yields, and higher output and inflation. The size of the effects is nevertheless sensitive to the speed of the exit strategy chosen by monetary authorities.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49457.

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Date of creation: Sep 2013
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Handle: RePEc:pra:mprapa:49457

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Keywords: unconventional monetary policies; quantitative easing; DSGE models; asset prices;

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  1. Evaluating Quantitative Easing: A DSGE Approach
    by Christian Zimmermann in NEP-DGE blog on 2013-09-15 16:03:30
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Cited by:
  1. M. Falagiarda & M. Marzo, 2012. "A DSGE model with Endogenous Term Structure," Working Papers wp830, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Matteo Falagiarda & Stefan Reitz, 2013. "Announcements of ECB Unconventional Programs: Implications for the Sovereign Risk of Italy," Kiel Working Papers 1866, Kiel Institute for the World Economy.

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