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The Macroeconomic Effects of Large-Scale Asset Purchase Programs

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  • Vasco Curdia

    (Federal Reserve Bank of New York)

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

  • Han Chen

    (University of Pennsylvania)

Abstract

The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the US Federal Reserve second Large-Scale Asset Purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on US data. Our simulations suggest that such a program increases GDP growth by less than half of a percentage point relative to the absence of intervention, but has a very persistent effect on the level of GDP. The marginal contribution of the asset purchase program to inflation is very small. One key reason behind our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, we find a substantially smaller semi-elasticity of the risk premium to the amount of debt in the hands of the private sector than the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 372.

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Date of creation: 2012
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Handle: RePEc:red:sed012:372

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  1. Robert E. Hall, 2011. "The Long Slump," American Economic Review, American Economic Association, vol. 101(2), pages 431-69, April.
  2. Kapetanios, George & Mumtaz, Haroon & Stevens, Ibrahim & Theodoridis, Konstantinos, 2012. "Assessing the economy-wide effects of quantitative easing," Bank of England working papers 443, Bank of England.
  3. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  4. Vasco Curdia & Michael Woodford, . "The Central-Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-19, Columbia University, Department of Economics.
  5. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Staff Reports 322, Federal Reserve Bank of New York.
  6. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  7. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," NBER Working Papers 15289, National Bureau of Economic Research, Inc.
  8. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  9. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  10. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
  11. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
  12. Vasco Curdia & Andrea Ferrero & Han Chen, 2012. "The Macroeconomic Effects of Large-Scale Asset Purchase Programs," 2012 Meeting Papers 372, Society for Economic Dynamics.
  13. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  14. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  15. Bruce Preston & Stefano Eusepi, 2011. "The maturity structure of debt, monetary policy and expectations stabilization," 2011 Meeting Papers 1287, Society for Economic Dynamics.
  16. Jules van Binsbergen & Jesús Fernández-Villaverde & Ralph S.J. Koijen & Juan F. Rubio-Ramírez, 2010. "The Term Structure of Interest Rates in a DSGE Model with Recursive Preferences," NBER Working Papers 15890, National Bureau of Economic Research, Inc.
  17. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium," CEPR Discussion Papers 4336, C.E.P.R. Discussion Papers.
  18. Harrison, Richard, 2012. "Asset purchase policy at the effective lower bound for interest rates," Bank of England working papers 444, Bank of England.
  19. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
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  1. The macroeconomic effects of large-scale asset purchase programs
    by Christian Zimmermann in NEP-DGE blog on 2012-11-24 15:49:16

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  1. > Macroeconomics > Monetary Theory
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