A Tale of Two Velocities
Quantitative easing in the US has meant a massive increase in the size of the Fedâ€™s balance sheet and the monetary base without a commensurate increase in inï¬‚ation. Instead, velocity has decreased dramatically. The only comparable episode in recent economic history was Japanâ€™s experiment with quantitative easing in the early 2000s, where inï¬‚ation remained low or negative and which ended in 2006 when the Bank of Japan reduced the size of its balance sheet to a level compatible with the growth path it was on before quantitative easing. We show that this is precisely what we would expect in a standard New Keynesian model in response to an increase in the money supply that is expected to be temporary.
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