Financial crisis and quantitative easing: can broad money tell us anything?
AbstractWhen Bank of England (and the Federal Reserve Board) introduced their quantitative easing (QE) operations they emphasised the effects on money and credit, but much of their empirical research on the effects of QE focuses on long-term interest rates. We use a flow of funds matrix with an independent central bank to show the implications of QE and other monetary developments, and argue that the financial crisis, the fiscal expansion and QE are likely to have constituted major exogenous shocks to money and credit in the UK which could not be digested immediately by the usual adjustment mechanisms. We present regressions of a reduced form model which considers the growth of nominal spending as determined by the growth of nominal money and other variables. These results suggest that money was not important during the Great Moderation but has had a much larger role in the period of the crisis and QE. We then use these estimates to illustrate the effects of the financial crisis and QE. We conclude that it would be useful to incorporate money and/or credit in wider macroeconometric models of the UK economy.
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Bibliographic InfoPaper provided by Department of Economics, School of Management and Languages, Heriot Watt University in its series Heriot-Watt University Economics Discussion Papers with number 1206.
Date of creation: 2012
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Other versions of this item:
- 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.
- NEP-ALL-2012-12-15 (All new papers)
- NEP-CBA-2012-12-15 (Central Banking)
- NEP-MON-2012-12-15 (Monetary Economics)
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