Policy Rules in Times of Prolonged Crisis: Quantitative Easing Abroad and Fiscal Adjustment at Home

This paper examines the international transmission of real and financial shocks which originate in, and are partially offset by, quantitative easing in a large financially-stressed country. Using a two-country model, we evaluate the adjustment in the non-stressed foreign country, following recurring negative shocks (to productivity or financial net worth or both), and the application of QE policies in the stressed country. We find that the non-stressed country can make effective use of tax-rate changes to stabilize asset prices, consumption and investment during the crisis pe-riod abroad, if the crisis is generated by productivity shocks or financial shocks, or both. The tax-rate regime in the non-stressed country works best, by generating positive externalities for the stressed country in the face of recurring productivity shocks. Under recurring financial net-worth shocks, the benefit ts of the tax-rate regime are less global, and more local, more confined to the non-stressed country.