Measuring the effects of large-scale asset purchases: The role of international financial markets and the financial accelerator

Abstract

We build and estimate a two-country structural macroeconomic model with meaningful household portfolio decisions over foreign and domestic bond holdings and financial intermediation to investigate the efficacy of large-scale asset purchases (LSAP) by a central bank. Financial intermediation between financial assets and the real economy means that asset purchases do not directly lead to increased real investment. Instead, asset purchases result in an accumulation of deposits at banks without a corresponding rise in loans to the real economy. In contrast to conventional monetary policy (CMP), positive effects of asset purchases primarily work through consumption and exports via changes in real exchange rates. We find that this is in accordance with local projection analysis performed using identified LSAP and CMP shocks. Further, historical decomposition of US data reveals that unconventional monetary policies supported real economic activity when interest rates where zero (2009–2015), but not after. However, their effect on financial markets remained significant through 2019.