Bank Of England Admits QE 'Economic' Benefits Are Temporary, More Effective As Plunge-Protection For Markets
Outspoken Bank of England economist Andy Haldane has dropped some uncomfortable truth bombs in his latest working paper about the (in)effectivess of QE.
In the past decade or so, a number of central banks have purchased assets financed by the creation of central bank reserves as a tool for loosening monetary policy – a policy often known as ‘quantitative easing’ or ‘QE’.
The first half of the paper reviews the international evidence on the impact on financial markets and economic activity of this policy. It finds that these central bank balance sheet expansions had a discernible and significant impact on financial markets and the economy. The second half of the paper provides new empirical analysis on the macroeconomic impact of central bank balance sheet expansions, across time and countries.
It finds three key results. First, it is only when central bank balance sheet expansions are used as a monetary policy tool that they have a significant macro-economic impact. Second, there is evidence for the US that the effectiveness of QE may vary over time, depending on the state of the economy and liquidity of the financial system. And third, QE can have strong spill-over effects cross-border, acting mainly via financial channels. For example, the impact of US QE on UK economic activity may be as large as the impact on US economic activity.
Specifically, Haldane note that the impact of QE is greater the weaker the economy and the more disturbed the state of financial markets. This state-dependency in the impact of QE is potentially important to our understanding of how QE has worked in the past and the circumstances in which it is likely to be effective in the future.
As Haldane explains, QE is a “confidence” trick…
And what one needs to believe for QE to work…
In other words, QE’s greatest benefit is as a plunge protection team mechanism for markets… not the economy…
The evidence suggests that QE has often had a significant impact on financial markets, albeit one whose scale has varied over time and across countries. What ultimately matters for monetary policy, however, is the impact of these asset purchases on the economy. There is some existing empirical evidence of a macroeconomic effect of QE. In general, however, estimates are quite uncertain.
As Haldane concludes…
In the past decade or so, central bank balance sheet expansions have been used as a tool for loosening monetary policy. This paper has gathered together empirical evidence on the effectiveness of these policies on financial markets and the wider economy. It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions. There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.
The effectiveness of QE policies does vary, however, both across countries and time. For example, there is some evidence of QE interventions being more effective when financial markets are disturbed. There is also evidence of strong positive international spill-over effects of QE from one country to another.
So QE works best when the market plunges and demands it? But its effect is only ‘real’ in makets not the real economy.
As the following impulse function shows, GDP and CPI ‘reactions’ fade fast but equity gains remain…
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Full working paper below: