Paper The Fiscal Cost of Quantitative Easing

Quantitative easing (QE) shortens the duration of the consolidated public balance sheet by swapping long-term government bonds for short, floating-rate liabilities, thereby shifting interest-rate risk onto taxpayers. In segmented bond markets, absorbing duration from the marginal investor can support real activity, but it also generates statecontingent losses that must be financed with distortionary taxes. We quantify the resulting ex ante fiscal-efficiency cost by forecasting QE-portfolio return distributions and mapping these into expected tax deadweight losses under a conservative terminal financing rule. Across all recent U.S. QE programs, the expected costs total 0.35% of GDP under risk-neutral valuation and 1.35% of GDP as a conservative upper bound. At origination, published estimates of QE output effects exceed our estimated fiscal-efficiency costs for each U.S. QE program.

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