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When and how to exit quantitative easing?

Author

Listed:
  • Yi Wen
Abstract
The essence of quantitative easing (QE) is reducing the cost of private borrowing through large-scale purchases of privately issued debt instead of public debt (Bernanke, 2009). Regardless of how effective this highly unconventional monetary policy may be in reviving private investment and the economy in general, it is time to consider how exiting from these private asset purchases will affect the economy. In a standard economic model, if monetary injections can increase aggregate output and employment, then the reverse action may undo such effects. But does this imply that the U.S. economy will dive into another recession once the Fed starts its large-scale asset sales (under the assumption that QE has successfully pulled the economy out of the Great Recession)? This article studies the likely impact of QE and its exit strategy on the economy. In particular, it shows that three aspects of the Federal Reserve?s exit strategy are important in achieving (or maintaining) maximum gains (if any) in aggregate output and employment under QE: (i) the timing of the exit, (ii) the pace of the exit, and (iii) the private sector?s expectations of when and how the Fed will exit.

Suggested Citation

  • Yi Wen, 2014. "When and how to exit quantitative easing?," Review, Federal Reserve Bank of St. Louis, vol. 96(3), pages 243-265.
    • Handle: RePEc:fip:fedlrv:00027
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    File URL: https://files.stlouisfed.org/files/htdocs/publications/review/2014/q3/wen.pdf
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    References listed on IDEAS

    as
    1. Pengfei Wang & Yi Wen & Zhiwei Xu, 2018. "Financial Development and Long-Run Volatility Trends," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 221-251, April.
    2. Pengfei Wang & Yi Wen, 2012. "Speculative Bubbles and Financial Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 184-221, July.
    3. Yi Wen, 2013. "Evaluating unconventional monetary policies -why aren’t they more effective?," Working Papers 2013-028, Federal Reserve Bank of St. Louis.
    4. Pengfei Wang & Yi Wen, 2009. "Financial development and economic volatility: a unified explanation," Working Papers 2009-022, Federal Reserve Bank of St. Louis.
    5. Pengfei Wang & Yi Wen & Zhiwei Xu, 2018. "Financial Development and Long-Run Volatility Trends," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 221-251, April.
    6. Yi Wen, 2014. "QE: when and how should the Fed exit?," Working Papers 2014-16, Federal Reserve Bank of St. Louis.
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    Cited by:

    1. Valentin Jouvanceau, 2016. "The Portfolio Rebalancing Channel of Quantitative Easing," Working Papers halshs-01349870, HAL.
    2. Feng Dong & Yi Wen, 2017. "Optimal Monetary Policy under Negative Interest Rate," Working Papers 2017-19, Federal Reserve Bank of St. Louis.
    3. Cantore, Cristiano & Meichtry, Pascal, 2023. "Unwinding quantitative easing: state dependency and household heterogeneity," Bank of England working papers 1030, Bank of England.
    4. Cui, Wei & Sterk, Vincent, 2021. "Quantitative easing with heterogeneous agents," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 68-90.
    5. Su, Chi-Wei & Pang, Lidong & Umar, Muhammad & Lobonţ, Oana-Ramona & Moldovan, Nicoleta-Claudia, 2022. "Does gold's hedging uncertainty aura fade away?," Resources Policy, Elsevier, vol. 77(C).

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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