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Quantitative Easing and the ‘New Normal’ in Monetary Policy

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  • Michael T. Kiley

Abstract

Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long‐term interest rates, may complement policy approaches focused on adjustments in short‐term interest rates. Simulation results using a large‐scale model (FRB/US) suggest that QE does not improve economic performance if the steady‐state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short‐term interest rates as the primary tool.

Suggested Citation

  • Michael T. Kiley, 2018. "Quantitative Easing and the ‘New Normal’ in Monetary Policy," Manchester School, University of Manchester, vol. 86(S1), pages 21-49, September.
  • Handle: RePEc:bla:manchs:v:86:y:2018:i:s1:p:21-49
    DOI: 10.1111/manc.12238
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Risks of low for longer
      by thebusinesscycleblog in The business cycle blog on 2019-10-19 20:54:33
    2. Fourth large-scale asset purchases program: A new hope
      by ? in FRED blog on 2020-03-23 13:00:00

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    2. Robert Kurtzman & David Zeke, 2020. "Misallocation Costs of Digging Deeper into the Central Bank Toolkit," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 94-126, October.
    3. Anna Bartocci & Alessandro Notarpietro & Massimiliano Pisani, 2019. "Non-standard monetary policy measures in the new normal," Temi di discussione (Economic working papers) 1251, Bank of Italy, Economic Research and International Relations Area.
    4. Günter Coenen & Carlos Montes-Galdón & Frank Smets, 2019. "Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 19/983, Ghent University, Faculty of Economics and Business Administration.
    5. Böhl, Gregor & Goy, Gavin & Strobel, Felix, 2020. "A structural investigation of quantitative easing," IMFS Working Paper Series 142, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    6. Dimitris Malliaropulos & Petros Migiakis, 2018. "Quantitative easing and sovereign bond yields: a global perspective," Working Papers 253, Bank of Greece.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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