Quantitative Easing

Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to empirical studies. QE therefore emerges as a powerful policy instrument to anchor expectations and stabilize output and inflation. However, QE interventions come with strong side effects on inequality and welfare. Estimation of the model reveals that QE greatly dampened the U.S. Great Recession