Macroeconomics seminar - Yunpeng Deng (UoM)

Title: Optimal Quantitative Easing Policy at Distorted Steady State

Abstract: I find a local Ramsey-optimal credit policy solution to GertlerKaradi(2011,2013)-type financial friction model from timeless perspective and with commitment (Woodford(2003)).   I analytically characterise the locally optimal Quantitative Easing (QE) policy in response to a shock to financial sector's net worth.  It proves that central bank's asset-purchase polices are effective in offsetting financial disturbance,  but the unwinding process is gradual due to the slow recapitalization of banking sector.  The results echo GertlerKaradi(2020),  who study the optimal QE policy under the assumption that financial constraints are loose at steady state.  Unlike their model,  I allow financial constraints to be binding at steady state, hence the steady state can be distorted to an arbitrary extent.  The optimal exit from QE is more gradual at distorted steady state than at efficient steady state.  In an application, I analyse the impact of central bank's remittance regime on optimal QE policy.