Measuring the Effects of Large-Scale Asset Purchases: The Role of International Financial Markets and the Financial Accelerator

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 by a central bank. Financial intermediation between financial assets and the real economy means that asset purchases may not directly lead to increased real investment. Instead asset purchases result in an accumulation of deposit at banks without a corresponding rise in loans to the real economy. In contrast to conventional policy, positive effects of asset purchase primarily work through consumption and exports via changes in real exchange rates. When all countries engage in asset purchases, the effectiveness of the policy overall falls. Historical decomposition of US data reveals that unconventional monetary policies supported real economic activity when interest rates where zero (2009-2015), but not after. Although, their effect on financial markets remained significant through 2019.