Misallocation Costs of Digging Deeper into the Central Bank Toolkit

Robert Kurtzman, David Zeke
2017 Finance and Economics Discussion Series  
Central bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, can induce a misallocation of resources through their heterogeneous effect on firms cost of capital. First, we analytically demonstrate the mechanism in a static model. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated heterogeneous firm New Keynesian DSGE model. The calibrated model suggests misallocation
more » ... cts from corporate bond buys can be large enough to make them less effective than government bond buys, which is not the case without accounting for misallocation effects.
doi:10.17016/feds.2017.076 fatcat:of7v6idmsvadthc3zk33oijwx4