I see more and more academic studies confirming that Federal Reserve QE policies were effective during the Great Recession. Here is the abstract of a 2018 paper by Eric Swanson:
I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. Third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.
And here’s the conclusion of a recent paper by Daniel Lewis:
Moreover, I find important macroeconomic effects. Both consumer and professional expectations respond to the shocks at the monthly frequency. Asset purchase shocks are especially impactful, raising expectations of both inflation and real GDP growth; this lends support to the expectations channel in explaining possible effects of unconventional policy shocks. Finally, the dynamic responses of both realized inflation and GDP growth display significant responses to asset purchase shocks, but not to Fed Funds or forward guidance shocks. Taken together, these results offer some of the first evidence on the macroeconomic effects of the Federal Reserve’s unconventional monetary policy broken down by policy dimension. They suggest that asset purchase policies in particular were effective with regard to a number of policy objectives.
This is not to say that “QE works”. That would be reasoning from a quantity change. For instance, QE often represents a defensive move after failed monetary policies, as the central bank meets a growing demand for liquidity that is itself caused by deflationary central bank policies. Rather, QE can work if utilized as part of a sensible monetary regime.
One goal of QE is to lower longer-term interest rates. But a truly effective QE program might well raise long-term rates.
READER COMMENTS
Brian Donohue
Jul 23 2019 at 8:15am
Excellent post.
Rodrigo Escalante
Jul 23 2019 at 7:30pm
Milton Friedman said that if MV=PQ and prices are sticky and velocity relatively constant in the short run, then an increase in the money supply would need to be reflected as an increase in output.
Benjamin Cole
Jul 23 2019 at 11:24pm
Let us hope QE works, and within acceptable political bounds.
Swanson also said,
Second, there may be political constraints that make it difficult for the Fed to use LSAPs and negative interest rates. During the 2008–15 U.S. ZLB period, LSAPs seemed to be poorly understood by the public and in many cases evoked strong negative reactions, such as being called “almost treasonous” by Texas Governor Rick Perry.10 And even though the Fed never used negative interest rates in 2008–15, the idea evokes similarly vehement opposition from many commercial and investment bankers, presumably due to fears about bank profitability: for example, Deutsche Bank CEO John Cryan argued they have “fatal consequences,” Allianz chief economic adviser Mohamed El-Erian called them an “insane experiment”….
—30—
I don’t suppose my favorite, money-financed fiscal programs, would enjoy a better reception.
But no one seems to be up in arms about TLTROs, another option, and one with a track record. ECB’s Draghi says they work. Should the Fed add TLTROs to its tool kit?
I am less positive on TLTROs and again, they seem one step removed from what is wanted, which is a boost in aggregate demand. I prefer to give money to people who will spend it. Taxing wage-earners less is one very obvious method.
bill
Jul 24 2019 at 1:22pm
I wish we could re-run 2008 with a cut of IOR to negative 25bps instead of the increase. I never understood the thought process behind the increase (any explanations would be appreciated). They basically printed the money and paid the banks to just store it and then people wondered why the banks didn’t lend it out to businesses.
Benjamin Cole
Jul 25 2019 at 6:23am
bill–
Great questions, but maybe banks would not lend enough anyway. Half of US commercial bank lending is on property, and real estate was in the toilet in 2008.
The more I ponder this, trying to stimulate an economy by trying to boost bank lending (and the endogenous creation of money) is rather weak tea. Why not just tax wage earners less? They will spend the money—their money, btw.
Roger McKinney
Jul 25 2019 at 3:16pm
I find such studies to be excellent examples of the joke about the drunk looking for his keys at night. Asked why he is looking under the street lamp he said “That’s where the light is.” Technically, such studies suffer from misspecification. Logically, they commit the post hoc fallacy. Economists need to understand history. If QE is the only way to get out of a recession, then how did the world manage it before central banks? The US alone endured about 50 recessions before the Fed, yet each was shorter and shallower than most of the recessions during the reign of the Fed. How is that possible? At no time before the Fed did the US have depressions like the Great D or the Great Recession or the recessions of 1981-82 when combined. Explain that!
The “economy” doesn’t recover on its own. Entrepreneurs and business people make it recover through their decisions to invest. George Reisman offers a good explanation in his book “Capitalism.” Hayek has offers another in his essay “The Ricardo Effect.”
Benjamin Cole
Jul 25 2019 at 11:49pm
Japan’s Banks Are Running Out of Room to Cope With Negative Rates–
headline from Bloomberg.
If banks are the transmission belt and the creators of endogenous money supply….if they go bust,,,,then what?
Maybe IOER is a bad idea but with a silver living—-helps the banks stay solvent.
TLTROs?
Comments are closed.