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Macroeconomics and Monetary Policy
“Suppose that the short-term real interest rate that was consistent with full employment had fallen to −2% or −3% sometime in the middle of the last decade. Then, what would happen?". In this work I review the growing literature about the natural rate of interest and the specific perspective proposed by Lawrence Summers, namely the demand-side view of secular stagnation. Second, I expound in detail the model of Eggertsson and Mehrotra (2014) with three-period overlapping generations, credit constraints and downward nominal wage rigidity in order to verify the theoretical feasibility of secular stagnation in advanced economies. Third, I tweak the original model by inserting a new production function a là King and Rebelo (2000) with deterministic and stochastic productivity. This way I capture new determinants of the decline in the natural rate. I identify how the current pandemic may trigger enduring adjustments in the savings-borrowings balance, a persistently negative natural rate and macro-financial consequences intratemporally and intertemporally. Fiscal policy must take the leading role in the response.
The thesis deals with the Expanded Asset Purchase Programme, that since the March of 2015 the European Central Bank under the guidance of Mario Draghi has implemented in order to face the spectre of deflation in the Eurozone. The work analyses the uncoventional monetary policy measure, the so-called quantitative easing, both from a historical and an economic point of view. The latter represents the core of the paper, where the financial mechanisms of the plan and its potential impact on the real economy and the inflation rate are shown. A final section is devoted to the similar actions taken previously by the Federal Reserve, the Bank of England and the Bank of Japan.