Endogenous QE can overcome the ZLB
Sims and Wu developed a quantitative DSGE framework to systematically evaluate three different types of unconventional policy tools – quantitative easing, forward guidance, and negative interest rate policy – as well as their interactions. They find that:
- Unconventional policies can stimulate output as much as a conventional
- QE can effectively neutralize the adverse consequences of a binding zero lower bound on the short term policy rate; and
- Their endogenous QE rule, which expands the central bank’s balance sheet to 25 percent of GDP (which is roughly in-line with the Fed’s balance sheet post-QE3), provides stimulus roughly equivalent to moving the policy rate 2 percentage points below zero.
Evaluating Central Banks’ Tool Kit: Past, Present, and Future
Authors: Eric Sims, Jing Cynthia Wu
From: Notre Dame University
The politics of QE
Defenders of central-bank independence argue that quantitative easing should have been avoided last time and is best avoided in the future, because it opens the door to political interference with the conduct of monetary policy. But political interference is even likelier if central banks shun QE in the next recession.
Unconventional Thinking about Unconventional Monetary Policies
By: Barry Eichengreen – University of California, Berkeley