The macroeconomic effects of large-scale asset purchase programs

By Han Chen, Vasco Cúrdia, and Andrea Ferrero

We simulate the Federal Reserve second Large-Scale Asset Purchase program in a DSGE model with bond market segmentation estimated on U.S. data. GDP growth increases by less than a third of a percentage point and inflation barely changes relative to the absence of intervention. The key reasons behind our findings are small estimates for both the elasticity of the risk premium to the quantity of long-term debt and the degree of financial market segmentation. Absent the commitment to keep the nominal interest rate at its lower bound for an extended period, the effects of asset purchase programs would be even smaller.

This paper seems to indicate that the various quantitative easing programs of the Fed and other central banks have minimal impact despite their enormous size. As they will eventually have to be undone, this should alleviate the fears about significantly negative outcomes in the future. An even if the impact is small, impact there is, and the central banks made considerable profits with this policy intervention, profits they transfered to the government.

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