The Macroeconomic Effects of Quantitative Easing

Abstract

The recent crisis has raised two key macroeconomic issues. First, has the quantitative easing policy pursued by the Federal Reserve had an effect on output, employment and prices? Second, whether ‘quantitative easing,’ is a mechanism through which monetary policy may continue to be able to stimulate economic activity despite the presence of the zero lower bound and various financial market frictions. This paper surveys the recent empirical evidence of the policy having a substantial impact on various interest rates in the United States because of certain financial frictions. It then uses this evidence to analyse the macroeconomic effects of the quantitative easing policy by simulating a New Keynesian macroeconomic model shown to closely fit the U.S. economy. It is concluded that the quantitative easing policy has had an impact on output, prices and employment, irrespective of any plausible financial frictions arising from the GFC. The result also demonstrates that the policy could be used as a monetary policy instrument. The paper ends with an examination of the numerous avenues of research that must be pursued before a firm conclusion can be made regarding the use of quantitative easing as a viable instrument of monetary policy.