How can it work ? On the impact of quantitative easing in the Eurozone
Abstract
How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as
the aggregate of two countries characterised by New Keynesian output and
inflation equations with a Tobinian money market equation that determines each
country's interest rate as a spread above the common policy rate. High spreads
determine negative output gaps and deflationary pressure. With the ECB policy
rate at the zero lower bound, QE expands money supply throughout the EZ. We
show that QE, if large enough, can indeed be effective by reducing country spreads
and the ensuing output gaps. However, zero output and deflation gaps can be
obtained for the EZ on average, but not for all single countries unless fully
symmetric conditions are met. Therefore fiscal accommodation at the country level
should also intervene, and we conclude that the coordination of fiscal and monetary
policies is of paramount importance.
Origin : Files produced by the author(s)