Hot new macroeconomic estimates from Hess Chung, Jean-Philippe Laforte, David Reifschneider, and John C. Williams investigate the impact of the Federal Reserve’s asset purchasing program:
An analysis shows that the Federal Reserve’s large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed’s securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.
The basic shape should come as no surprise. Monetary expansion raises aggregate demand. That means more employment and more inflation. If the economy is already close to full employment, extra demand mostly means more inflation. But if the economy is far from full employment, then you mostly get more employment and more output.
Relatedly, the Hamilton Project is offering $25,000 as a prize to whoever comes up with the best job creating idea. I’m not long-winded enough to stretch this out into a 5,000 word essay, but it seems to me that if monetary expansion leads to job creation in a depressed economy and the economy is still depressed, then we ought to have more monetary expansion.