Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing

69 Pages Posted: 13 Jul 2015 Last revised: 20 Apr 2023

See all articles by Saroj Bhattarai

Saroj Bhattarai

Pennsylvania State University - Department of Economics

Gauti B. Eggertsson

Federal Reserve Bank of New York

Bulat Gafarov

Department of Agricultural and Resource Economics, UC Davis

Date Written: July 2015

Abstract

We present a signalling theory of Quantitative Easing (QE) at the zero lower bound on the short term nominal interest rate. QE is effective because it generates a credible signal of low future real interest rates in a time consistent equilibrium. We show these results in two models. One has coordinated monetary and fiscal policy. The other an independent central bank with balance sheet concerns. Numerical experiments show that the signalling effect can be substantial in both models.

Suggested Citation

Bhattarai, Saroj and Eggertsson, Gauti B. and Gafarov, Bulat, Time Consistency and the Duration of Government Debt: A Signalling Theory of Quantitative Easing (July 2015). NBER Working Paper No. w21336, Available at SSRN: https://ssrn.com/abstract=2629941

Saroj Bhattarai (Contact Author)

Pennsylvania State University - Department of Economics ( email )

Harrisburg, PA
United States

Gauti B. Eggertsson

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Bulat Gafarov

Department of Agricultural and Resource Economics, UC Davis ( email )

One Shields Avenue
SS&H Building
Davis, CA 95616
United States

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