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Quantitative Easing as a Policy Tool Under the Effective Lower Bound

Author

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  • Abeer Reza
  • Eric Santor
  • Lena Suchanek

Abstract

This paper summarizes the international evidence on the performance of quantitative easing (QE) as a monetary policy tool when conventional policy rates are constrained by the effective lower bound (ELB). A large body of evidence suggests that expanding the central bank’s balance sheet through large-scale asset purchases can provide effective stimulus under the ELB. Transmission channels for QE are broadly similar to those of conventional policy, notwithstanding some important but subtle differences. The effectiveness of QE may be affected by imperfect pass-through to asset prices, possible leakage through global capital reallocation, a reduced impact through the bank lending channel, and diminishing returns to additional rounds of QE. Although the benefits of QE appear, so far, to outweigh the costs, at some point this may be reversed. The exact “effective quantitative bound” where the costs of QE become larger than the benefits is as yet unknown. The summary of the evidence, however, suggests that QE is indeed an “adequate” substitute for monetary policy at the ELB, rather than a “perfect” one.

Suggested Citation

  • Abeer Reza & Eric Santor & Lena Suchanek, 2015. "Quantitative Easing as a Policy Tool Under the Effective Lower Bound," Discussion Papers 15-14, Bank of Canada.
  • Handle: RePEc:bca:bocadp:15-14
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    References listed on IDEAS

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    Cited by:

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    2. Gregory Bauer & Gurnain Pasricha & Rodrigo Sekkel & Yaz Terajima, 2018. "The Global Financial Cycle, Monetary Policies, and Macroprudential Regulations in Small, Open Economies," Canadian Public Policy, University of Toronto Press, vol. 44(2), pages 81-99, June.
    3. Steve Ambler, 2016. "Putting Money to Work: Monetary Policy in a Low Interest Rate Environment," e-briefs 249, C.D. Howe Institute.
    4. Harriet Jackson, 2015. "The International Experience with Negative Policy Rates," Discussion Papers 15-13, Bank of Canada.
    5. Pierre Fortin, 2016. "A Stable 4% Inflation Could Get Canadians One Half Million More Jobs," Cahiers de recherche 1604, CIRPEE.
    6. Domenico Lombardi & Pierre Siklos & Samantha St. Amand, 2018. "A Survey Of The International Evidence And Lessons Learned About Unconventional Monetary Policies: Is A ‘New Normal’ In Our Future?," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1229-1256, December.
    7. Stephanos Papadamou & Nikolaos A. Kyriazis & Lydia Mermigka, 2017. "Japanese Mutual Funds before and after the Crisis Outburst: A Style- and Performance-Analysis," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 5(1), pages 1-20, March.

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    More about this item

    Keywords

    Central bank research; International topics; Monetary policy framework; Transmission of monetary policy;
    All these keywords.

    JEL classification:

    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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