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Evaluating unconventional monetary policies -why aren’t they more effective?

  • Yi Wen
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We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some long- standing financial puzzles and monetary policy questions facing central banks around the world, such as (i) the fight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, (iii) the inverted yield curve, and (iv) the low inflation puzzle under quantitative easing.

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File URL: http://research.stlouisfed.org/wp/2013/2013-028.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-028.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-028
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  1. Pengfei Wang & Yi Wen, 2009. "Financial development and economic volatility: a unified explanation," Working Papers 2009-022, Federal Reserve Bank of St. Louis.
  2. Nobuhiro Kiyotaki & John Moore, 2012. "Liquidity, Business Cycles, and Monetary Policy," NBER Working Papers 17934, National Bureau of Economic Research, Inc.
  3. Pengfei Wang & Yi Wen, 2013. "Financial development and long-run volatility trends," Working Papers 2013-003, Federal Reserve Bank of St. Louis.
  4. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  5. Vasco Curdia & Andrea Ferrero & Han Chen, 2012. "The Macroeconomic Effects of Large-Scale Asset Purchase Programs," 2012 Meeting Papers 372, Society for Economic Dynamics.
  6. Roger E.A. Farmer, 2012. "Qualitative Easing: How it Works and Why it Matters," NBER Working Papers 18421, National Bureau of Economic Research, Inc.
  7. Nathaniel Throckmorton & Benjamin Keen & Alexander Richter & William Gavin, 2013. "Global Dynamics at the Zero Lower Bound," 2013 Meeting Papers 839, Society for Economic Dynamics.
  8. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
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