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Macroeconomic effectiveness of non-standard monetary policy and early exit. A model-based evaluation

Listed author(s):
  • Lorenzo Burlon

    ()

    (Bank of Italy)

  • Andrea Gerali

    ()

    (Bank of Italy)

  • Alessandro Notarpietro

    ()

    (Bank of Italy)

  • Massimiliano Pisani

    ()

    (Bank of Italy)

This paper evaluates the macroeconomic effects of the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative strategies as regards (i) the unwinding of asset positions accumulated under the APP and (ii) communication of current and future paths of the policy rate (forward guidance). To this purpose, we simulate a New Keynesian model of the euro area. Our results are as follows. First, as the monetary authority brings forward the selling of long-term sovereign bonds, the stimulus from the APP on inflation and economic activity is correspondingly reduced. In particular, if the bonds are sold immediately after purchases end, the impact on inflation is negligible. Second, if the monetary authority communicates that it will hold the policy rate constant for one year instead of two, the APP is less effective, and the inflation increase is halved. Third, the subdued impact of the APP associated with an early exit from the programme delays the return to a standard monetary policy regime.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1074/en_tema_1074.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 1074.

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Date of creation: Jul 2016
Handle: RePEc:bdi:wptemi:td_1074_16
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  1. Gomes, S. & Jacquinot, P. & Pisani, M., 2012. "The EAGLE. A model for policy analysis of macroeconomic interdependence in the euro area," Economic Modelling, Elsevier, vol. 29(5), pages 1686-1714.
  2. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
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  4. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
  5. Lorenzo Burlon & Andrea Gerali & Alessandro Notarpietro & Massimiliano Pisani, 2016. "Non-standard monetary policy, asset prices and macroprudential policy in a monetary union," Temi di discussione (Economic working papers) 1089, Bank of Italy, Economic Research and International Relations Area.
  6. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2008. "The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 944, European Central Bank.
  7. Motto, Roberto & Altavilla, Carlo & Carboni, Giacomo, 2015. "Asset purchase programmes and financial markets: lessons from the euro area," Working Paper Series 1864, European Central Bank.
  8. Giancarlo Corsetti & Gernot J. Müller, 2006. "Twin deficits: squaring theory, evidence and common sense," Economic Policy, CEPR;CES;MSH, vol. 21(48), pages 597-638, October.
  9. Paolo Pesenti, 2008. "The Global Economy Model: Theoretical Framework," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 243-284, June.
  10. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  11. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
  12. 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.
  13. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599 Elsevier.
  14. Lorenzo Burlon & Andrea Gerali & Alessandro Notarpietro & Massimiliano Pisani, 2015. "Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation," Temi di discussione (Economic working papers) 1015, Bank of Italy, Economic Research and International Relations Area.
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