Qe 1 vs. 2 vs. 3... A framework for analyzing large-scale asset purchases as a monetary policy tool

Mark Gertler, Peter Karadi

    Research output: Contribution to journalArticle

    Abstract

    We introduce large-scale asset purchases (LSAPs) as a monetary policy tool within a macroeconomic model.We allow for purchases of both long-term government bonds and securities with some private risks. We argue that LSAPs should be thought of as central bank intermediation that can affect the economy to the extent there exist limits to arbitrage in private intermediation. We then build a model with limits to arbitrage in banking that vary countercyclically and where the frictions are greater for private securities than for government bonds. We use the framework to study the impact of LSAPs that have the broad features of the different quantitative easing (QE) programs the Federal Reserve pursued over the course of the crisis. We find that (i) LSAPs work in the model in a way mostly consistent with the evidence; (ii) purchases of securities with some private risk have stronger effects than purchases of government bonds; (iii) the effects of the LSAPs depend heavily on whether the zero lower bound is binding. Our model does not rely on the central bank having a more efficient intermediation technology than the private sector: We assume the opposite.

    Original languageEnglish (US)
    Pages (from-to)5-53
    Number of pages49
    JournalInternational Journal of Central Banking
    Volume9
    Issue numberSUPPL.1
    StatePublished - Jan 2013

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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