Time Consistency and Duration of Government Debt: A Model of Quantitative Easing

Saroj Bhattarai, University of Texas at Austin, Gauti B. Eggertsson, Brown University, and Bulat Gafarov, University of California, Davis

This paper presents a model of quantitative easing (QE) at the zero lower bound (ZLB) on the short-term nominal interest rate. QE, which reduces the maturity of government debt, is effective at the ZLB because it generates expectations of future monetary expansion in a time-consistent equilibrium. Numerical experiments show that this effect can be substantial.