Events

Dr. Seung Joo Lee
Associate Professor
Oxford University-Saïd

The failure of conventional monetary policy to stabilize the economy at the zero-lower bound (ZLB) has made unconventional interventions more prevalent in recent times, which calls for a new macroeconomic framework for properly analyzing these policies. In this paper, we develop a New-Keynesian framework that incorporates the term-structure of financial markets and an active role for government and central bank’s balance sheet size and composition. We show that financial market segmentation and the household’s endogenous portfolio reallocation are crucial features to properly understand the effects of Large-Scale Asset Purchase (LSAP) programs. We propose a new micro-foundation based on imperfect information about expected future asset returns that easily accommodates distinct degrees of market segmentation across asset classes and maturities, while providing intuitive and tractable expressions for the household’s portfolio shares. Our analysis reveals that government’s issuance of risk-less bonds stimulates the economy when conventional monetary policy is constrained at the ZLB, which is consistent with the literature on the so-called “safe-asset shortage problems”. We also find that central bank’s bond purchases across different maturities act as a major determinant of the level and slope of the term-structure, and yield-curve-control (YCC) policies that actively manipulate long-term yields are powerful in terms of stabilization both during normal times and at the ZLB. As a drawback, YCC policies increase the likelihood of ZLB episodes and their durations, thereby locking the central bank in a position in which the short-term rate is less useful as a policy tool.