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On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound

Author

Listed:
  • Christopher Waller

    (Federal Reserve Bank of St. Louis)

  • Paola Boel

    (Sveriges Riksbank)

Abstract

We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, in this environment, not all agents are satiated at the zero lower bound even when the Friedman rule is the best interest rate policy the central bank can implement. Therefore, there is scope for central bank policies of liquidity provision even at the zero lower bound. This is because such policies temporarily relax the liquidity constraint of impatient agents without harming the patient ones, thus improving welfare. Due to a pricing externality, this may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances.

Suggested Citation

  • Christopher Waller & Paola Boel, 2017. "On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound," 2017 Meeting Papers 1030, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1030
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_1030.pdf
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    References listed on IDEAS

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