Macroeconomic and Fiscal Consequences of Quantitative Easing

IMF Working Papers, August 8, 2025

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Authors: Tobias Adrian, Christopher J. Erceg, Marcin Kolasa, Jesper L Linde, Pawel Zabczyk
Published: August 8, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229018623.001

Quantitative easing (QE) has been criticized for helping fuel the post-COVID inflation boom and causing large central bank losses.
The paper argues QE should be evaluated mainly on its ability to achieve core macro-objectives and its effects on the consolidated fiscal position of the government and central bank, although central bank losses can matter to the extent that they may weaken central bank credibility.
Using a DSGE model with segmented asset markets, the authors show QE can:
- provide a sizeable boost to output and inflation in a deep liquidity trap;
- reduce public debt substantially, contrasting with the rise in public debt that occurs under fiscal expansion.
In a “shallow" liquidity trap in which the notional interest rate is only slightly negative, QE:
- runs more risk of causing the economy to overheat, especially if forward guidance has a strong element of commitment;
- is more likely to generate sizeable central bank losses.
Some refinements in strategy, including the use of escape clauses, can help mitigate overheating risks.

Model framework:
- A DSGE model with segmented asset markets is used to assess macroeconomic and fiscal effects of QE.
Deep liquidity trap scenario:
- QE provides a sizeable boost to output and inflation.
- QE can reduce public debt substantially in this scenario.
Shallow liquidity trap scenario:
- Notional interest rate is only slightly negative.
- QE increases risk of economic overheating, particularly when forward guidance has a strong commitment element.
- QE is more likely to generate sizeable central bank losses.
Fiscal versus monetary stimulus:
- QE’s debt-reducing effect contrasts with the rise in public debt under fiscal expansion, making QE an attractive tool in a high debt environment.
Central bank losses and credibility:
- Central bank losses matter to the extent they may weaken central bank credibility.

Evaluate QE primarily by:
- its ability to achieve core macro-objectives (output and inflation stabilization);
- its effects on the consolidated fiscal position of the government and central bank.
Exercise greater caution when deploying QE in shallow liquidity traps due to overheating and loss risks.
Consider refinements to QE strategy to mitigate risks:
- incorporate escape clauses to limit overheating risks;
- tailor forward guidance to avoid excessive commitment that amplifies overheating risk.