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Wall Street vs. Main Street QE

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  • Eric R. Sims
  • Jing Cynthia Wu

Abstract

The Federal Reserve has reacted swiftly to the COVID-19 pandemic. It has resuscitated many of its programs from the last crisis by lending to the financial sector, which we refer to as “Wall Street QE.” The Fed is now proposing to also lend directly to, and purchase debt directly from, non-financial firms, which we label “Main Street QE.” Our paper develops a new framework to compare and contrast these different policies. In a situation in which financial intermediary balance sheets are impaired, such as the Great Recession, Main Street and Wall Street QE are perfect substitutes and both stimulate aggregate demand. In contrast, for situations like the one we are now facing due to COVID-19, where the production sector is facing significant cash flow shortages, Wall Street QE becomes almost completely ineffective, whereas Main Street QE can be highly stimulative.

Suggested Citation

  • Eric R. Sims & Jing Cynthia Wu, 2020. "Wall Street vs. Main Street QE," NBER Working Papers 27295, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27295
    Note: EFG ME
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    References listed on IDEAS

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    1. Lael Brainard, 2019. "Federal Reserve Review of Monetary Policy Strategy, Tools, and Communications: Some Preliminary Views : a speech at the Presentation of the 2019 William F. Butler Award New York Association for Busine," Speech 1106, Board of Governors of the Federal Reserve System (U.S.).
    2. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2017. "Targeting Long Rates in a Model with Segmented Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 205-242, January.
    3. Mark Gertler & Peter Karadi, 2013. "QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 5-53, January.
    4. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    5. Eric Sims & Jing Cynthia Wu & Ji Zhang, 2023. "The Four-Equation New Keynesian Model," The Review of Economics and Statistics, MIT Press, vol. 105(4), pages 931-947, July.
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    Cited by:

    1. Richard H. Clarida & Burcu Duygan-Bump & Chiara Scotti, 2021. "The COVID-19 Crisis and the Federal Reserve's Policy Response," Finance and Economics Discussion Series 2021-035, Board of Governors of the Federal Reserve System (U.S.).
    2. Michael T. Kiley, 2020. "Pandemic Recession Dynamics: The Role of Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound," Finance and Economics Discussion Series 2020-083, Board of Governors of the Federal Reserve System (U.S.).
    3. Galindo Gil, Hamilton, 2021. "What kind of firm is more responsive to the unconventional monetary policy?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 188-200.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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