Should-Read: Luigi Iovino and Dmitriy Sergeyev: Quantitative Easing without Rational Expectations

Should-Read: Luigi Iovino and Dmitriy Sergeyev: Quantitative Easing without Rational Expectations
: “We study the effects of risky assets purchases financed by issuance of riskless debt by the government (quantitative easing) in a model without rational expectations…

…We use bounded rationality in the form of level-k thinking and the associated reflective equilibrium that converges to the rational expectations equilibrium in the limit. This equilibrium notion rationalizes the idea that it is difficult to change expectations about economic outcomes even if it is easy to shift expectations about the policy. Quantitative easing policy increases the price and production of risky assets in the reflective equilibrium, while it is neutral in the rational expectations equilibrium. In the extension of the model, we show that bounded rationality dampens the strength of the market segmentation channel of quantitative easing…