Quantitative Easing and the “New Normal” in Monetary Policy

My most recent paper.  Short abstract: Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE) may complement policy approaches focused on adjustments in short-term interest rates. Simulation results suggest that QE does not improve economic performance if the steady-state interest rate is high; 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.

Summer’s End — and a reading list to catch up on what you may have missed

Labor Day weekend brings the end of summer.  Some papers you may have missed:

Nakata and Schmidt: A description of how to adjust settings from simple Taylor rules to achieve an inflation target, on average, when interest rates are affected by the effective lower bound.

Ajello, Laubach, Lopez-Salido, and Nakata find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain.

David Reifschneider suggests that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances.

Risks Associated with Low Inflation

Recent papers from the Federal Reserve on

The factors that influence the degree to which low inflation impedes economic performance: Arias, Erceg, and Trabandt (2016)

The interaction of the zero-lower bound on nominal interest rates and the expected rate of inflation in a standard class of macroeconomic models: Hills, Nakata, and Schmidt (2016)

How effective is quantitative easing in stimulating economic activity and raising inflation?

My main research contributions on this topic have now each been published.

Quantitative easing lowers Treasury and corporate bond yields, but the pass through to corporate bond yields is more modest than that associated with a lower federal funds rate: Kiley (2016)

As a result, overall financial conditions improve by less with quantitative easing than with similar movements in the federal funds rate: Kiley (2014a)

And this evidence is consistent with the more limited stimulus associated with long-term interest rates relative to short-term interest rates: Kiley (2014b)