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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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    References listed on IDEAS

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    Cited by:

    1. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    2. Kee-Youn Kang, 2019. "Central Bank purchases of private assets: An evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 326-346, January.
    3. Christopher J. Waller, 2015. "Microfoundations of Money: Why They Matter," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 289-301.
    4. James Bullard, 2016. "Permazero," Cato Journal, Cato Journal, Cato Institute, vol. 36(2), pages 415-429, Spring/Su.
      • James B. Bullard, 2016. "Permazero," Review, Federal Reserve Bank of St. Louis, vol. 98(2).
      • James B. Bullard, 2015. "Permazero," Speech 256, Federal Reserve Bank of St. Louis.
    5. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    6. Nicola Amendola & Leo Ferraris & Fabrizio Mattesini, 2016. "Optimal Monetary Policy in a Pure Currency Economy with Heterogenous Agents," CEIS Research Paper 394, Tor Vergata University, CEIS, revised 02 Feb 2017.
    7. Uras, Burak R. & van Buggenum, Hugo, 2022. "Preference heterogeneity and optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    8. van Buggenum, Hugo & Uras, Burak, 2019. "Money, Asset Markets and Efficiency of Capital Formation," Other publications TiSEM 7db639bc-8d7d-4a3c-8034-a, Tilburg University, School of Economics and Management.

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    More about this item

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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