Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing
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.
We thank Roberto Billi, Jim Bullard, Guillermo Calvo, Oli Coibion, Giuseppe Ferrero, Mark Gertler, Marc Giannoni, Andy Levin, Emi Nakamura, Ricardo Reis, Tao Zha, seminar participants at HEC Montreal, Emory University, University of Texas at Austin, and Brown University, and conference participants at NBER ME spring meeting, HKIMR/New York Fed Conference on Domestic and International Dimensions of Unconventional Monetary Policy, Society of Economic Dynamics Annual meeting, Mid-west Macro spring meeting, CEPR European Summer Symposium in International Macroeconomics, Annual Conference on Computing and Finance, NBER Japan Project Meeting, Annual Research Conference at Swiss National Bank, ECB Workshop on Non-Standard Monetary Policy Measures, Annual Research Conference at De Nederlandsche Bank, Latin American Meetings of Econometric Society, and Columbia University Conference on Macroeconomic Policy and Safe Assets for helpful comments and suggestions. First version: Sept 2013; This version: June 2015. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.