Quantitative Easing as a Policy Tool Under the Effective Lower Bound

This paper summarizes the international evidence on the performance of quantitative easing (QE) as a monetary policy tool when conventional policy rates are constrained by the effective lower bound (ELB). A large body of evidence suggests that expanding the central bank’s balance sheet through large-scale asset purchases can provide effective stimulus under the ELB. Transmission channels for QE are broadly similar to those of conventional policy, notwithstanding some important but subtle differences. The effectiveness of QE may be affected by imperfect pass-through to asset prices, possible leakage through global capital reallocation, a reduced impact through the bank lending channel, and diminishing returns to additional rounds of QE. Although the benefits of QE appear, so far, to outweigh the costs, at some point this may be reversed. The exact “effective quantitative bound” where the costs of QE become larger than the benefits is as yet unknown. The summary of the evidence, however, suggests that QE is indeed an “adequate” substitute for monetary policy at the ELB, rather than a “perfect” one.