Working Paper

Misallocation Costs of Digging Deeper into the Central Bank Toolkit

Abstract: Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms cost of capital. First, we analytically demonstrate the mechanism in a static model. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation effects from corporate bond buys can be large enough to make them less effective than government bond buys, which is not the case without accounting for misallocation effects.

Keywords: QE; LSAPs; Misallocation;

JEL Classification: E22; E51; E52; G21;

https://doi.org/10.17016/FEDS.2017.076

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2017-08-03

Number: 2017-076

Pages: 43 pages