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Quantitative Easing in an Endogenous Growth Model

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  • Parantap Basu

    (Durham Business School)

Abstract

A remarkable feature of the current great recession is an upward shift in the trend of the proportion of households leaving the labour force due to schooling. Using an endogenous growth model with agent’s time allocation between work, leisure and schooling, I argue that the quantitative easing might have contributed to this upward trend in addition to a decline in TFP. Although a growing literature analyzes the macroeconomic effects of the present quantitative easing (QE), little efforts have been directed to understand the effects of this QE on households’ time allocation between various activities and the consequent labour force participation decision. I show that QE is an unconventional disinflationary way of generating seigniorage revenue which imposes an adverse wealth effect on the household. In response, to this negative wealth shock, households reduce their leisure time. If the government spends seigniorage revenue on TFP enhancing projects such as education, agents will divert the freed up time more to schooling and drop out from the labour force. A Bayesian estimation of my DSGE endogenous growth model with the US data lends support to the model predictions.

Suggested Citation

  • Parantap Basu, 2014. "Quantitative Easing in an Endogenous Growth Model," CEMAP Working Papers 2014_01, Durham University Business School.
    • Handle: RePEc:dur:cegapw:2014_01
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    References listed on IDEAS

    as
    1. Basu, Parantap & Gillman, Max & Pearlman, Joseph, 2012. "Inflation, human capital and Tobin's q," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1057-1074.
    2. Parantap Basu & JKeshab Bhattarai, 2012. "Government Bias in Education, Schooling Attainment, and Long-Run Growth," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 127-143, July.
    3. Haslag, Joseph H, 1998. "Monetary Policy, Banking, and Growth," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 489-500, July.
    4. Parantap Basu & Keshab Bhattarai, 2012. "Cognitive Skills, Openness and Growth," The Economic Record, The Economic Society of Australia, vol. 88(280), pages 18-38, March.
    5. Julie L. Hotchkiss & M. Melinda Pitts & Fernando Rios-Avila, 2012. "A closer look at nonparticipants during and after the Great Recession," FRB Atlanta Working Paper 2012-10, Federal Reserve Bank of Atlanta.
    6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    7. Richard G. Anderson & Robert H. Rasche, 2001. "Retail sweep programs and bank reserves, 1994-1999," Review, Federal Reserve Bank of St. Louis, vol. 83(Jan), pages 51-72.
    8. Parantap Basu & JKeshab Bhattarai, 2012. "Government Bias in Education, Schooling Attainment, and Long-Run Growth," Southern Economic Journal, Southern Economic Association, vol. 79(1), pages 127-143, July.
    9. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
    10. Stephen D. Williamson, 2012. "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach," American Economic Review, American Economic Association, vol. 102(6), pages 2570-2605, October.
    11. Basu, Parantap, 2001. "Reserve Ratio, Seigniorage and Growth," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 397-416, July.
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