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Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing

Saroj Bhattarai, Gauti B. Eggertsson, Bulat Gafarov

NBER Working Paper No. 21336
Issued in July 2015
NBER Program(s):Monetary Economics

We present a signalling theory of Quantitative Easing (QE) at the zero lower bound on the short term nominal interest rate. QE is effective because it generates a credible signal of low future real interest rates in a time consistent equilibrium. We show these results in two models. One has coordinated monetary and fiscal policy. The other an independent central bank with balance sheet concerns. Numerical experiments show that the signalling effect can be substantial in both models.

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Document Object Identifier (DOI): 10.3386/w21336

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