Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate
The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expans...
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| Published in | IDEAS Working Paper Series from RePEc |
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| Main Author | |
| Format | Paper |
| Language | English |
| Published |
St. Louis
Federal Reserve Bank of St. Louis
01.01.2011
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| Online Access | Get full text |
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| Summary: | The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion. |
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