A primer on quantitative easing

Bank of England Economists have written a nice primer on quantitative easing. It explains how it impacts markets and effects various players. It also points to a short review of  empirical work on QE:

Quantitative easing has been used on few occasions in the past, so there is little empirical evidence on which to draw. One obvious international example is the experience of Japan earlier this decade. Bernanke et al (2004) found some evidence of an impact on long-term  interest rates from quantitative easing. However, Baba et al (2005) concluded that the Bank of Japan’s commitment to keep policy rates low was more important for reducing long-term interest rates than its use of quantitative easing. Asset purchases have also been used to influence government bond yields in the United States in the past. Bernanke (2002) highlighted that the Federal Reserve was successful in maintaining a ceiling onlong-term Treasury bond yields in the 1940s.

Recent announcements of asset purchases by central banks provide further evidence that such purchases can influence asset prices. Kohn (2009) highlighted that the Federal Reserve’s announcements of purchases of mortgage-backed securities and Treasury bonds reduced mortgage and other long-term rates in the United States appreciably — by some estimates by as much as a percentage point. And the Bank of England’s announcement on 5 March that the Bank would be purchasing £75 billion of assets financed by central bank money also appeared to have an impact on UK government bond yields. Gilt yields in the 5 to 25 year maturity range eligible for purchase fell around 40–90 basis points by the end of the day following the announcement.

Evidence on the impact of money injections on output and inflation is sparser. For the Japanese episode, Kimura  et al (2003) found the effect to be small but highly uncertain. It is difficult to know how important quantitative easing was in the case of Japan without knowing how much worse the recession would have been without it.

The impact on yields was short-lived as we have seen them rising again. Moreover, yield moement depends on a list of other factors and it will be difficult to pinpoint the fall on QE alone.

A good quick read.

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One Response to “A primer on quantitative easing”

  1. Interest Rates » A primer on quantitative easing « Mostly Economics Says:

    […] Read the rest of this great post here […]

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