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Essential concepts necessary to consider when evaluating the efficacy of quantitative easing

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  • Putnam, Bluford H.

Abstract

The economic impact from quantitative easing (QE) may be much less than assumed by the Federal Reserve. One focus is on the effectiveness of QE to stabilize a failing banking system, and the judgment here is largely positive. A second focus, especially in the US, is on evaluating subsequent rounds of QE that were implemented after the economy had resumed growth and after the banking sector had recapitalized and returned to profitability. For these subsequent rounds of QE, the reviews are decidedly mixed and heavily dependent on the assumptions embedded in the economic models used by the researchers. Researchers willing to assume that the US is a closed domestic economy tend to find a large impact on long-term interest rates from QE. If the US is part of a highly integrated global economy, a smaller effect is presumed. Then there is the more important and controversial evaluation of whether there is any impact on real GDP growth and job creation from QE once the economy is growing again, even if unemployment rates remain historically elevated. What one chooses to ignore or assume does not exist can be more important to the conclusions of QE evaluations than may meet the eye. Inappropriate assumptions can lead to poor decisions.

Suggested Citation

  • Putnam, Bluford H., 2013. "Essential concepts necessary to consider when evaluating the efficacy of quantitative easing," Review of Financial Economics, Elsevier, vol. 22(1), pages 1-7.
  • Handle: RePEc:eee:revfin:v:22:y:2013:i:1:p:1-7
    DOI: 10.1016/j.rfe.2012.12.001
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    References listed on IDEAS

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    1. Bernanke, Ben S., 2012. "Monetary Policy since the Onset of the Crisis : a speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 31, 2012," Speech 645, Board of Governors of the Federal Reserve System (U.S.).
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    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    5. Putnam, Bluford H. & Azzarello, Samantha, 2012. "A Bayesian interpretation of the Federal Reserve's dual mandate and the Taylor Rule," Review of Financial Economics, Elsevier, vol. 21(3), pages 111-119.
    6. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 385-414, November.
    7. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Putnam, Bluford H. & Azzarello, Samantha, 2015. "Evolving dynamics of the relationship between US core inflation and unemployment," Review of Financial Economics, Elsevier, vol. 25(C), pages 27-34.
    2. Tzu-Kuang Hsu & Chin-Chang Tsai, 2017. "Explore the Impact of the Trading Value, The Oil Price and Quantitative Easing Policy on the Taiwan and Korea Stock Market Return with Quantile Regression," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 7(1), pages 15-26, January.
    3. Orlowski, Lucjan T., 2015. "From pit to electronic trading: Impact on price volatility of U.S. Treasury futures," Review of Financial Economics, Elsevier, vol. 25(C), pages 3-9.
    4. Paul D. Mueller & Joshua Wojnilower, 2016. "The Federal Reserve's Floor System: Immediate Gain for Remote Pain?," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 31(Summer 20), pages 15-40.
    5. Taoufik Bouraoui, 2015. "The effect of reducing quantitative easing on emerging markets," Applied Economics, Taylor & Francis Journals, vol. 47(15), pages 1562-1573, March.

    More about this item

    Keywords

    Monetary policy; Quantitative easing; Central banking; Deleveraging;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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