Essential concepts necessary to consider when evaluating the efficacy of quantitative easing

Abstract

The economic impact from quantitative easing (QE) may be much less than assumed by the Federal Reserve. One focus is on the effectiveness of QE to stabilize a failing banking system, and the judgment here is largely positive. A second focus, especially in the US, is on evaluating subsequent rounds of QE that were implemented after the economy had resumed growth and after the banking sector had recapitalized and returned to profitability. For these subsequent rounds of QE, the reviews are decidedly mixed and heavily dependent on the assumptions embedded in the economic models used by the researchers. Researchers willing to assume that the US is a closed domestic economy tend to find a large impact on long-term interest rates from QE. If the US is part of a highly integrated global economy, a smaller effect is presumed. Then there is the more important and controversial evaluation of whether there is any impact on real GDP growth and job creation from QE once the economy is growing again, even if unemployment rates remain historically elevated. What one chooses to ignore or assume does not exist can be more important to the conclusions of QE evaluations than may meet the eye. Inappropriate assumptions can lead to poor decisions.

The effect of reducing quantitative easing on emerging markets

“…The federal fund rate was also impacted and fell by approximately 300 basis points. Putnam (2013) supports these findings and concludes that QE1, in particular, was an effective policy in fighting a failing banking system facing a shortage in liquidity and systematic solvency.…”

Evolving dynamics of the relationship between US core inflation and unemployment

“…If this is the case, the Fed may need to examine the links between policy actions in a much different manner from the past. For example, quantitative easing during 2011–2014 may not have been of much use at all for labor markets, as suggested by Putnam (2013, 2014); while prolonged periods of extremely low short‐term rates may risk asset price booms instead of rising core inflation.…”

From phase transitions to Modern Monetary Theory: A framework for analyzing the pandemic of 2020

“…Lowering short‐term interest rates to near zero would clearly not be enough to limit the economic damage from a cascading collapse of the economic network, akin to a disequilibrium phase transition in physics, as noted at the time by Putnam (2020). Central bank purchases of government bonds (i.e., Quantitative Easing or QE) was unlikely to help much either, given that this approach had failed to generate additional economic growth or inflation when tried in an aggressive fashion by the central banks in United States and Europe after the Great Recession of 2008, as examined by Putnam (2013, 2015). Arguably the Bank of Japan's (BoJ’s) even more extreme version of QE, which took its balance sheet to over 100% of GDP and, unlike Europe or the United States, also included buying large quantities of corporate debt and even equities via exchange‐traded funds, provided a very slight boost to Japanese inflation through the transmission mechanism of depreciating the yen in 2013 and 2014.…”