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
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: 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
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