Macroeconomic Effects of Quantitative Easing 1

In this paper we analyze the effects of unconventional monetary policy within a stochastic dynamic general equilibrium model. We consider a variety of assets that in particular differ with regard to their eligibility in open market operations. This leads to different equilibrium interest rates, where spreads originates in the liquidity of assets. While only short-term government bonds are eligible in normal times, money supply can be eased via changes in the collateral requirements when the policy rate is at the zero lower bound. We examine the long-run and short-run effects of an unconventional monetary policy, i.e. of acception also firm loans in open market operations. This policy is shown to stimulate the economy via an increase the total amount of eligible securities (quantitative easing) and via a decrease in the loan rate (qualitative easing). We further apply the model to examine liquidity demand shocks and to quantify the effects of the Federal Reserve response in 2008.