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The impact of QE on the UK economy – some supportive monetarist arithmetic

Author

Listed:
  • Bridges, Jonathan

    () (Bank of England)

  • Thomas, Ryland

    () (Bank of England)

Abstract

This paper uses a simple money demand and supply framework to estimate the impact of quantitative easing (QE) on asset prices and nominal spending. We use standard money accounting to try to establish the impact of asset purchases on broad money holdings. We show that the initial impact of £200 billion of asset purchases on the money supply was partially offset by other ‘shocks’ to the money supply. Some of these offsets may have been the indirect result of QE. Our central case estimate is that QE boosted the broad money supply by £122 billion or 8%. We apply our estimates of the impact of QE on the money supply to a set of ‘monetarist’ econometric models that articulate the extent to which asset prices and spending need to adjust to make the demand for money consistent with the increased broad money supply associated with QE. Our preferred, central case estimate is that an 8% increase in money holdings may have pushed down on yields by an average of around 150 basis points in 2010 and increased asset values by approximately 20%. This in turn would have had a peak impact on output of 2% by the start of 2011, with an impact on inflation of 1 percentage point around a year later. These estimates are necessarily uncertain and we show the sensitivity of our results to different assumptions about the size of the shock to the money supply and the nature of the transmission mechanism.

Suggested Citation

  • 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.
  • Handle: RePEc:boe:boeewp:0442
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    References listed on IDEAS

    as
    1. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629.
    2. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
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    5. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 369-394, Oct.-Dec..
    6. Joseph E. Gagnon & Matthew Raskin & Julie Remache & Brian P. Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
    7. Baumeister, Christiane & Benati, Luca, 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.
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    More about this item

    Keywords

    Quantitative easing; money demand; monetary policy;

    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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