The history and future of Quantitative Easing…

Ben Broadbent of Bank of England reviews the experiences of QE policy. He remembers Friedman and Shwartz’s work on US monetary history:

In 2002, the University of Chicago held a 90th birthday party for the great American economist Milton Friedman. One important guest was Anna Schwartz, who four decades earlier had co-written with Friedman the landmark book A Monetary History of the United States.

It’s possible that, even among those of you prepared to give up a pleasant July evening to come to a talk by a central bank official, an 800-page tome entitled “A monetary history of [anywhere]” won’t have found its way to the very top of your holiday reading list.

But it’s actually a gripping read, especially the chapter about the Great Depression. It also has a claim as the most influential piece of economic history ever written. The book pioneered a new “narrative” approach to identifying independent changes in monetary policy – the idea being that, to separate these from the more automatic (“endogenous”) reactions of policymakers to the economy you needed to scour the historic record and understand how their decisions were actually taken.

It changed economists’ perceptions of the role of monetary forces, including monetary policy, in economic fluctuations. For example, it helped to establish the view that the effects of monetary policy on real variables – real national income or its distribution, for example – are in the long run negligibly small. You cannot permanently enrich a country, or raise real wages, simply by easing monetary policy and engineering some inflation.

Equally, the book argued that policy can have very powerful effects at shorter, cyclical horizons. In particular, it claimed that the Great Depression could have been averted had the US Federal Reserve not over-tightened policy in the late 1920s and if had it acted more precipitously to loosen it once the downturn
began. The appropriate measures would have included an earlier abandonment of the gold standard. They would also have involved “large-scale open-market purchases”, designed to contain the rise in private-sector bond yields and supply reserves to the banking system. We have a new name for this – we now call it
“Quantitative Easing” – but the policy itself is not new.

He says QE is not printing money and has had impacted on the lines of Friedman/Schwartz:

QE has often been described as a “new-fangled” policy, something that involves “printing money” and has served only to engineer large rises in the prices of financial and other assets, benefiting only the better off. 

Broadly speaking I don’t think any of these things is true. It’s not new; it’s not exactly printing money; equity and house prices are in real terms still comfortably below their pre-crisis levels; inequality hasn’t risen – nor, according to the most detailed analysis available, did easier monetary policy have any net impact on it.

To be sure, asset prices would probably have fallen further had QE and other measures not been put in place in 2009. The same goes for the economy itself. As far as we can tell, asset purchases provided significant support to aggregate demand, even if it wasn’t enough to offset fully the extended contractionary
effects of the crisis. Perhaps Friedman and Schwartz over-emphasised the failures of the US Fed as a cause of the Great Depression. But I don’t think anyone can reasonably argue it was worth risking those same mistakes a second time.

Later rounds of QE may have been less effective than the first. In the US, where the Fed has begun to shrink its balance sheet, its “QT” announcements appear to have had very little impact. At least in part, that’s likely to be by design. The pace of unwind is very gradual. And the FOMC emphasised that, to the
extent a shrinking balance sheet tightened monetary conditions the official interest rate would be commensurately lower (than it would otherwise have been). The overall stance of policy would be set to ensure the central bank meets its objectives.

The same is true here. Our task remains to hit the inflation target and we will always seek to ensure that the combined effects of the APF and of more conventional changes in Bank Rate are set to that end. 

The debates on QE being a success or failure will interest econs for a long time…

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