Assessing the Economy‐wide Effects of Quantitative Easing
AbstractThis paper examines the macroeconomic impact of the first round of quantitative easing (QE) by the Bank of England which started in March 2009. Although Bank Rate, the UK policy rate, was reduced to Â½%, effectively its lower bound, the Bankâs Monetary Policy Committee felt that additional measures were necessary to meet the inflation target in the medium term. The policy of QE entailed buying private and mainly public assets in large quantities using central bank money, with the aim of injecting money into the economy and boosting nominal spending, in order to help achieve the Bankâs inflation target. Over the period from March 2009 to January 2010, the Bank of England purchased Â£200 billion of assets, mainly consisting of government securities. We attempt to quantify the effects of these purchases by focusing on the impact of lower long-term interest rates on the wider economy. This is motivated by empirical evidence indicating that QE purchases reduced long-term UK government bond yields by about 100 basis points. Other transmission channels are also possible, but are not considered in this paper. We use three different models to conduct counterfactual simulations to estimate the impact of QE on output and inflation: a large Bayesian VAR; a change-point structural VAR; and a time-varying parameter VAR. Our preferred average estimates from the three models suggest that QE may have had a peak effect on the level of real GDP of around 1Â½% and a peak effect on annual CPI inflation of about 1Â¼ percentage points. These estimates are shown to vary considerably across the different model specifications, and with the precise assumptions made to generate the counterfactual simulations, and are therefore subject to considerable uncertainty.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 122 (2012)
Issue (Month): 564 (November)
Contact details of provider:
Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
Phone: +44 1334 462479
Web page: http://www.res.org.uk/
More information through EDIRC
Other versions of this item:
- Kapetanios, George & Mumtaz, Haroon & Stevens, Ibrahim & Theodoridis, Konstantinos, 2012. "Assessing the economy-wide effects of quantitative easing," Bank of England working papers 443, Bank of England.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carriero, Andrea & Kapetanios, George & Marcellino, Massimiliano, 2010.
"Forecasting Government Bond Yields with Large Bayesian VARs,"
CEPR Discussion Papers
7796, C.E.P.R. Discussion Papers.
- A. Carriero & G. Kapetanios & M. Marcellino, 2010. "Forecasting Government Bond Yields with Large Bayesian VARs," Economics Working Papers ECO2010/17, European University Institute.
- Vasco Curdia & Michael Woodford, 2010.
"Conventional and Unconventional Monetary Policy,"
0910-17, Columbia University, Department of Economics.
- Harrison, Richard, 2012. "Asset purchase policy at the effective lower bound for interest rates," Bank of England working papers 444, Bank of England.
- Bańbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2008.
"Large Bayesian VARs,"
Working Paper Series
0966, European Central Bank.
- Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
- Domenico Giannone & Martha Banbura & Lucrezia Reichlin, 2008. "Bayesian VARs with large panels," ULB Institutional Repository 2013/13388, ULB -- Universite Libre de Bruxelles.
- Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers 6326, C.E.P.R. Discussion Papers.
- Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
- Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004.
"Tobin's Imperfect Asset Substitution in Optimizing General Equilibrium,"
CEPR Discussion Papers
4336, C.E.P.R. Discussion Papers.
- Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
- Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012.
"Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 44, pages 47-82, 02.
- Hess Chung & Jean-Philippe Laforte & David Reifschneider & John C. Williams, 2011. "Have we underestimated the likelihood and severity of zero lower bound events?," Working Paper Series 2011-01, Federal Reserve Bank of San Francisco.
- Baumeister, Christiane & Benati, Luca, 2010. "Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound," Working Paper Series 1258, European Central Bank.
- Kadiyala, K. Rao & Karlsson, Sune, 1994.
"Numerical Aspects of Bayesian VAR-modeling,"
Working Paper Series in Economics and Finance
12, Stockholm School of Economics.
- Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
- Eric T. Swanson, 2011.
"Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2,"
2011 Meeting Papers
982, Society for Economic Dynamics.
- Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
- Eric T. Swanson, 2011. "Let’s twist again: a high-frequency event-study analysis of operation twist and its implications for QE2," Working Paper Series 2011-08, Federal Reserve Bank of San Francisco.
- Kimura Takeshi & Small David H., 2006.
"Quantitative Monetary Easing and Risk in Financial Asset Markets,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 6(1), pages 1-54, March.
- Takeshi Kimura & David Small, 2004. "Quantitative monetary easing and risk in financial asset markets," Finance and Economics Discussion Series 2004-57, Board of Governors of the Federal Reserve System (U.S.).
- Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012.
"Market response to policy initiatives during the global financial crisis,"
Journal of International Economics,
Elsevier, vol. 87(1), pages 162-177.
- Yacine Aït-Sahalia & Jochen Andritzky & Andreas Jobst & Sylwia Nowak & Natalia Tamirisa, 2010. "Market Response to Policy Initiatives during the Global Financial Crisis," NBER Working Papers 15809, National Bureau of Economic Research, Inc.
- Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
- Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
- Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
- Daniel F. Waggoner & Tao Zha, 1999.
"Conditional Forecasts In Dynamic Multivariate Models,"
The Review of Economics and Statistics,
MIT Press, vol. 81(4), pages 639-651, November.
- Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," Working Paper 98-22, Federal Reserve Bank of Atlanta.
- Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
- Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.