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The Macroeconomic Effects of Large-Scale Asset Purchase Programs

Author Info

  • Vasco Curdia

    (Federal Reserve Bank of New York)

  • Andrea Ferrero

    (Federal Reserve Bank of New York)

  • Han Chen

    (University of Pennsylvania)

Abstract

The effects of asset purchase programs on macroeconomic variables are likely to be moderate. We reach this conclusion after simulating the impact of the US Federal Reserve second Large-Scale Asset Purchase program (LSAP II) in a DSGE model enriched with a preferred habitat framework and estimated on US data. Our simulations suggest that such a program increases GDP growth by less than half of a percentage point relative to the absence of intervention, but has a very persistent effect on the level of GDP. The marginal contribution of the asset purchase program to inflation is very small. One key reason behind our findings is that we estimate a small degree of financial market segmentation. If we enrich the set of observables with a measure of long-term debt, we find a substantially smaller semi-elasticity of the risk premium to the amount of debt in the hands of the private sector than the recent empirical literature. In this case, our baseline estimates of the effects of LSAP II on the macroeconomy decrease by at least a factor of two. Throughout the analysis, a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on GDP growth and inflation.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 372.

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Date of creation: 2012
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Handle: RePEc:red:sed012:372
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2008. "Investment Shocks and Business Cycles," CEPR Discussion Papers 6739, C.E.P.R. Discussion Papers.
  2. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  3. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
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  5. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
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  8. Robert E. Hall, 2011. "The Long Slump," NBER Working Papers 16741, National Bureau of Economic Research, Inc.
  9. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
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  14. van Binsbergen, Jules H. & Fernández-Villaverde, Jesús & Koijen, Ralph S.J. & Rubio-Ramírez, Juan, 2012. "The term structure of interest rates in a DSGE model with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 634-648.
  15. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  16. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
  17. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  18. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
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  1. The macroeconomic effects of large-scale asset purchase programs
    by Christian Zimmermann in NEP-DGE blog on 2012-11-24 15:49:16
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