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Assessing the Economy‐wide Effects of Quantitative Easing

Author

Listed:
  • George Kapetanios
  • Haroon Mumtaz
  • Ibrahim Stevens
  • Konstantinos Theodoridis

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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Suggested Citation

  • George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‐wide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 316-347, November.
  • Handle: RePEc:ecj:econjl:v:122:y:2012:i:564:p:f316-f347
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    More about this item

    JEL classification:

    • 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; State Space Models
    • 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

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