Quantitative Easing and Asset Bubbles in a Stock-Flow Consistent Framework

Levy Economics Institute Working Papers No. 897

32 Pages Posted: 12 Jan 2018

See all articles by Cameron Haas

Cameron Haas

Bard College at Simon's Rock, Students

Tai Young-Taft

Bard College - The Levy Economics Institute

Date Written: November 12, 2018

Abstract

Ever since the Great Recession, central banks have supplemented their traditional policy tool of setting the short-term interest rate with massive buyouts of assets to extend lines of credit and jolt flagging demand. As with many new policies, there have been a range of reactions from economists, with some extolling quantitative easing’s expansionary virtues and others fearing it might invariably lead to overvaluation of assets, instigating economic instability and bubble behavior. To investigate these theories, we combine elements of the models in chapters 5, 10, and 11 of Godley and Lavoie’s (2007) Monetary Economics with equations for quantitative easing and endogenous bubbles in a new model. By running the model under a variety of parameters, we study the causal links between quantitative easing, asset overvaluation, and macroeconomic performance. Preliminary results suggest that rather than being pro- or countercyclical, quantitative easing acts as a sort of phase shift with respect to time.

Keywords: Quantitative Easing, Stock-flow Consistency, Macroeconomics

JEL Classification: E12; E44; E58; E16; E21

Suggested Citation

Haas, Cameron and Young-Taft, Tai, Quantitative Easing and Asset Bubbles in a Stock-Flow Consistent Framework (November 12, 2018). Levy Economics Institute Working Papers No. 897, Available at SSRN: https://ssrn.com/abstract=3100905 or http://dx.doi.org/10.2139/ssrn.3100905

Cameron Haas

Bard College at Simon's Rock, Students

84 Alford Road
Great Barrington, MA 01230
United States

Tai Young-Taft (Contact Author)

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

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