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

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.