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Assessing the economy-wide effects of quantitative easing

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Author Info

  • Kapetanios, George

    () (Queen Mary, University of London)

  • Mumtaz, Haroon

    () (Bank of England)

  • Stevens, Ibrahim

    () (Bank of England)

  • Theodoridis, Konstantinos

    () (Bank of England)

Abstract

This 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 ½%, effectively its lower bound, the Bank’s 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 Bank’s inflation target. Over the period from March 2009 to January 2010, the Bank of England purchased £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 1½% and a peak effect on annual CPI inflation of about 1¼ 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.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 443.

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Length: 45 pages
Date of creation: 27 Jan 2012
Date of revision:
Handle: RePEc:boe:boeewp:0443

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Related research

Keywords: Bayesian methods; large-scale asset purchases; quantitative easing; vector autoregressions;

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References

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  1. Cúrdia, Vasco & Woodford, Michael, 2009. "Conventional and Unconventional Monetary Policy," CEPR Discussion Papers 7514, C.E.P.R. Discussion Papers.
  2. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  3. 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.
  4. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
  5. Takeshi Kimura & David H. Small, 2006. "Quantitative Monetary Easing and Risk in Financial Asset Markets," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 6.
  6. 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.
  7. 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.
  8. Christiane Baumeister & Luca Benati, 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.
  9. 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.
  10. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  11. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, September.
  12. 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.
  13. Harrison, Richard, 2012. "Asset purchase policy at the effective lower bound for interest rates," Bank of England working papers 444, Bank of England.
  14. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," Working Paper 98-22, Federal Reserve Bank of Atlanta.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. On QE
    by chris dillow in Stumbling and Mumbling on 2012-02-06 15:06:45
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Cited by:
  1. M. Hashem Pesaran & Ron P. Smith, 2012. "Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing," CESifo Working Paper Series 3879, CESifo Group Munich.
  2. David Cobham & Yue Kang, 2012. "Financial Crisis And Quantitative Easing: Can Broad Money Tell Us Anything?," Manchester School, University of Manchester, vol. 80, pages 54-76, 09.
  3. Christopher Martin & Costas Milas, 2012. "Quantitative easing: a sceptical survey," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 750-764, WINTER.
  4. Schüder, Stefan, 2011. "Monetary policy trade-offs in a portfolio model with endogenous asset supply," MPRA Paper 32019, University Library of Munich, Germany.
  5. Bridges, Jonathan & Thomas, Ryland, 2012. "The impact of QE on the UK economy – some supportive monetarist arithmetic," Bank of England working papers 442, Bank of England.
  6. Vasco Curdia & Andrea Ferrero & Han Chen, 2012. "The Macroeconomic Effects of Large-Scale Asset Purchase Programs," 2012 Meeting Papers 372, Society for Economic Dynamics.
  7. Kristóf Lehmann, 2012. "International experiences with unconventional central bank instruments," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 7(2), pages 24-30, June.
  8. Joyce, Michael, 2012. "Quantitative easing and other unconventional monetary policies: Bank of England conference summary," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 48-56.
  9. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages F271-F288, November.
  10. Joyce, Michael & Tong, Matthew & Woods, Robert, 2011. "The United Kingdom’s quantitative easing policy: design, operation and impact," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 200-212.

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