Adding QE can fix New Keynesian models – BoE paper
“Mild adjustments” to balance sheet are enough to avoid paradoxical results, authors find
Allowing a central bank to conduct quantitative easing in a standard New Keynesian (NK) model can fix seemingly paradoxical results that emerge at the effective lower bound (ELB), a new Bank of England working paper finds.
Dario Bonciani and Joonseok Oh note the behaviour of inflation expectations at the ELB can create these anomalies. At the ELB, the central bank cannot cut the policy rate, so in a standard NK model, a drop in prices leads to lower inflation expectations, a rise in the real
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