QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool

TLDR

LSAPs act as central‑bank intermediation that can influence the economy when private arbitrage limits exist. The study introduces LSAPs as a monetary policy tool in a macroeconomic model and uses it to analyze the impact of the Federal Reserve’s QE programs during the crisis. A countercyclical macro model is built with arbitrage limits that are higher for private‑risk securities than for government bonds, assuming the central bank is less efficient than the private sector. The model’s results largely align with evidence, showing that private‑risk securities have stronger effects than bonds and that outcomes depend heavily on whether the zero lower bound is binding.

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.