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An Unconventional Approach to Evaluate the Bank of England's Asset Purchase Program

Listed author(s):
  • Matthias Neuenkirch

Empirical papers analysing the transmission of (unconventional) monetary policy typically rely on a vector autoregressive framework. In this paper, I complement these studies and employ a matching approach to examine the impact of the Bank of England's asset purchase program on macroeconomic quantities in the UK. My sample covers the period March 2001-December 2015 and five small open inflation targeting economies. Using entropy balancing, I create a synthetic control group comprised of credible counterfactuals for the sample of observations subject to the asset purchase program. My key results are that a 100 bn GBP increase in asset purchases has a significant and positive effect on GDP growth with a peak effect of 0.66-0.69 percentage points (pp) after 30 months. The same increase leads to a reduction in the inflation gap with a peak effect between -0.77 and -0.94 pp after 30 months. An in-depth analysis reveals that the latter finding is not driven by the choice of the empirical methodology. In contrast, I find that the returns on asset purchases are decreasing (i) over time and (ii) with the level of asset purchases. This causes the impact of asset purchases on the inflation gap to eventually become negative.

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File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2016-11.pdf
File Function: First version, 2016
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Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2016-11.

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Length: 21 pages
Date of creation: 2016
Handle: RePEc:trr:wpaper:201611
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Web page: http://www.uni-trier.de/index.php?id=2118

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  1. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
  2. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(01), pages 25-46, December.
  3. Christopher Martin & Costas Milas, 2012. "Quantitative easing: a sceptical survey," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 750-764, WINTER.
  4. Lin, Shu & Ye, Haichun, 2007. "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2521-2533, November.
  5. Leonardo Gambacorta & Boris Hofmann & Gert Peersman, 2014. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 615-642, 06.
  6. Charles A. E. Goodhart & Jonathan P. Ashworth, 2012. "QE: a successful start may be running into diminishing returns," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 640-670, WINTER.
  7. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
  8. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
  9. Weale, Martin & Wieladek, Tomasz, 2016. "What are the macroeconomic effects of asset purchases?," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 81-93.
  10. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
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