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

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  • Yi Wen

Abstract

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.

Suggested Citation

  • Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2013-028
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    References listed on IDEAS

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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. John Moore & Nobuhiro Kiyotaki, 2008. "Liquidity, Business Cycles, and Monetary Policy," 2008 Meeting Papers 35, Society for Economic Dynamics.
    3. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    4. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "Global Dynamics at the Zero Lower Bound," Auburn Economics Working Paper Series auwp2013-17, Department of Economics, Auburn University.
    5. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    6. Pengfei Wang & Yi Wen & Zhiwei Xu, 2018. "Financial Development and Long-Run Volatility Trends"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 221-251, April.
    7. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2012. "The Macroeconomic Effects of Large‐scale Asset Purchase Programmes," Economic Journal, Royal Economic Society, vol. 122(564), pages 289-315, November.
    8. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
    9. Guido Lorenzoni & Veronica Guerrieri, 2010. "Credit Crises and Liquidity Traps," 2010 Meeting Papers 1182, Society for Economic Dynamics.
    10. Gavin, William T. & Keen, Benjamin D. & Richter, Alexander W. & Throckmorton, Nathaniel A., 2015. "The zero lower bound, the dual mandate, and unconventional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 14-38.
    11. James Bullard & Jacek Suda & Aarti Singh & Costas Azariadis, 2014. "Debt Overhang and Monetary Policy," 2014 Meeting Papers 948, Society for Economic Dynamics.
    12. Roger E.A. Farmer, 2012. "Qualitative Easing: How it Works and Why it Matters," NBER Working Papers 18421, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Bozhechkova, A.V. & Sinelnikova-Muryleva, Elena Vladimirovna, 2016. "The Impact of Higher Interest Rates on Loans to the Economic Growth of the Russian Federation in the Current Environment," Working Papers 21310, Russian Presidential Academy of National Economy and Public Administration.

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    Keywords

    Monetary policy ; Liquidity (Economics) ; Inflation (Finance);

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