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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Quantitative Easing and the “New Normal” in Monetary Policy
Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.
Cite this item
Michael T. Kiley, Quantitative Easing and the “New Normal” in Monetary Policy, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2018-004, 17 Jan 2018.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
Keywords: Interest rates ; Macroeconomic models ; Monetary policy
This item with handle RePEc:fip:fedgfe:2018-04
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