R.Anton Braun
University of Tokyo

Abstract

What are the economic effects of a large increase in real balances of money in a zero interest rate environment? This paper develops a computable overlapping generations model with real balance effects to answer this question. In our model there are two sources of real balance effects: finite lifespans and borrowing constraints. We find that the zero lower bound on the nominal interest rate creates an asymmetry in the welfare costs of inflation. A monetary aggregate targeting policy that is too tight has very large and negative effects on steady-state welfare. A loose monetary aggregate targeting policy has only modest effects on welfare. Results from a dynamic analysis using data from Japan finds that the effects of "quantitative easing" vary significantly depending on the timing and duration of the policy. Quantitative easing also has large and heterogeneous effects on consumption of cohorts of different ages.

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