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Are QE and Conventional Monetary Policy Substitutable

Eric Sims & Cynthia Wu

International Journal of Central Banking2020article
AJG 3ABDC A
Weight
0.51

Abstract

Yes! We study the substitutability between conventional monetary policy based on the adjustment of a short-term policy interest rate with quantitative easing (QE). We do so in a four-equation New Keynesian model featuring financial frictions that allows QE to be economically relevant. We analytically derive how much QE versus conventional policy is necessary to implement an inflation target. Quantitatively, the observed expansion of the Federal Reserve's balance sheet over the zero lower bound (ZLB) period provides stimulus equivalent to cutting the policy rate to 2 percentage points below zero. This is in line with the decline in the empirical shadow federal funds rate series. Moreover, we show that the amount of QE required to achieve price stability depends on the expected duration of the ZLB.

5 citations

Cite this paper

@article{eric2020,
  title        = {{Are QE and Conventional Monetary Policy Substitutable}},
  author       = {Eric Sims & Cynthia Wu},
  journal      = {International Journal of Central Banking},
  year         = {2020},
}

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Are QE and Conventional Monetary Policy Substitutable

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Evidence weight

0.51

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.41 × 0.4 = 0.17
M · momentum0.80 × 0.15 = 0.12
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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