Unconventional monetary policies and the macroeconomy: The impact of the UK's QE2 and funding for lending scheme

Abstract

In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional Quantitative Easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler Auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank's QE purchases during 2011-12 and the initial phase of the FLS each boosted GDP in the UK by around 0.5%-0.8%. Their effect on inflation was also broadly positive reaching around 0.6 pp, at its peak.

UK monetary policy in an estimated DSGE model with financial frictions

“…Here we choose a VARX (vector autoregression with exogenous variables) as our auxiliary model. 9 The parameter vector β contains 12 coefficients in total, 10 B2. 9 The VARX takes the following matrix form where non-stationary processes (i.e.…”

Mortgage pricing and monetary policy

“…Hence, we can control for lender and quarter fixed effects-thereby flexibly controlling for concurrent macro shocks that could affect the funding costs of all U.K. lenders (Churm, Joyce, Kapetanios, and Theodoridis, 2021)-and exploit within-lender variation over time to identify the effects of the FLS on lenders' costs.…”

“…This approach allows us to exploit within-lender variation over time to identify the effects of the FLS on lenders' costs, thus flexibly controlling for several concurrent aggregate factorsmost notably developments in the euro area-that could affect the funding costs of U.K. lenders (Churm, Joyce, Kapetanios, and Theodoridis, 2021). 1 Nevertheless, identification of the effect of the FLS on lenders' costs still faces one main challenge.…”

Monetary Policy and Economic Performance Since the Financial Crisis

“…Hesse, Hofmann, and Weber (2018) revisit the macroeconomic and financial effects of the asset purchase programs launched by the Federal Reserve and the BOE from 2008 and suggest that the early programs "had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero." See alsoJoyce and Tong (2012) andChurm et al (2021).40 SeeAndrade et al (2016);Doehr and Martínez-García (2015); andWeale and Wieladek (2016) for a related discussion of the macroeconomic effects of news and announcements about asset purchase programs in the United States and the United Kingdom.41 We use a three-country version of SIGMA, a DSGE model maintained by Federal Reserve Board staff. In this simulation, AFE policymakers cut their policy rate 350 basis points at the recession's onset.42 In the current low interest rate environment, the ELB would bind faster in the AFEs for a given recessionary shock than in our scenario, leading to larger downturns abroad and greater negative spillovers for the U.S. economy, unless AFE central banks provide accommodation through other tools.…”