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Revisiting the New Keynesian policy paradoxes under QE

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  • Bonciani, Dario

    (Bank of England)

  • Oh, Joonseok

    (Freie Universität Berlin)

Abstract

Standard New Keynesian models deliver puzzling results at the effective lower bound of short-term interest rates: greater price flexibility amplifies the fall in output in response to adverse demand shocks; labour tax cuts are contractionary; the multipliers of wasteful government spending are large. These outcomes stem from a failure to characterise monetary policy correctly. Both analytically and numerically, we show that allowing the central bank to respond to inflation with quantitative easing (QE) can resolve all these paradoxes. In quantitative terms, mild adjustments to the central bank’s balance sheet are sufficient to obtain results more in line with conventional wisdom.

Suggested Citation

  • Bonciani, Dario & Oh, Joonseok, 2021. "Revisiting the New Keynesian policy paradoxes under QE," Bank of England working papers 908, Bank of England.
    • Handle: RePEc:boe:boeewp:0908
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    Cited by:

    1. de Groot, Oliver & Haas, Alexander, 2023. "The signalling channel of negative interest rates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 87-103.
    2. Bonciani, Dario & Oh, Joonseok, 2021. "Optimal monetary policy mix at the zero lower bound," Bank of England working papers 945, Bank of England.

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    More about this item

    Keywords

    Policy paradoxes; unconventional monetary policy; quantitative easing; liquidity trap; effective lower bound;
    All these keywords.

    JEL classification:

    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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