The APP is effective in the framework, because the central bank can temporarily improve the balance sheet constraints of financial intermediaries, which then leads to better credit conditions, improving the economic outlook and raising the inflation rate. The ensuing lower term premium, furthermore, depreciates the exchange rate to satisfy an arbitrage condition between the local and foreign long-term sovereign debt markets.
This exchange rate channel increases consumer prices, with marginal impact on output, not unlike those identified by Dedola and co-authors (2017). This new version of the framework will continue to help us form a consistent view about conjunctural developments and will be applied to analyse the quantitative impact of alternative policy scenarios. So what have I learned about QE programmes and specifically the APP?