Evaluating quantitative tightening policies
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2024-06-07
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Teles, Vladimir Kuhl
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In this paper, I develop a TANK (two-agent New Keynesian) DSGE model to analyze the impact of Central Banks' Quantitative Tightening (QT) policy. While previous models focused on unconventional monetary policies with private securities targeted at productive capital investment, this model incorporates the purchase of MBS (mortgage-backed securities) to stimulate the economy. Selling MBS during QT reduces GDP and inflation but can have adverse effects in scenarios of high inflation and heated activity. A more cautious approach to reducing the balance sheet seems preferable to avoid consumption distortions between durable and non-durable goods. Additionally, responding only to variations in GDP, rather than also to inflation, may result in lower inflation and a more resilient GDP.