Today’s lesson in academic quantitative easing, then, comes courtesy of Bank of England deputy governor Charlie Bean:
The rationale for asset purchases — that relative asset supplies affect asset prices and returns — instead lies in an older strand of the literature, dating back to Tobin (1969) and Brunner and Meltzer (1972). Under normal circumstances, when the asset purchases are financed by the issuance of additional central bank money, one would also expect the increase in commercial bank reserves to lead to increased lending. However, when banks are trying to de-leverage, such additional reserves are more likely to be hoarded. That appears to be what happened during the Japanese experiment with quantitative easing in the early part of this decade and a similar response is to be expected from banks at the current juncture.
The initial responses in the United Kingdom to these measures have been moderately encouraging. Government bond yields fell significantly on the commencement of the programme of asset purchases, and yields appear to be some 50-75 basis points lower than they would otherwise be. And there are also signs of beneficial effects on conditions in the relevant corporate credit markets. Meier (2009) provides a fuller assessment. But it is very early to draw conclusions on the efficacy of these measures, as the transmission lags through to nominal spending are likely to be quite long. Moreover, even in some years time, it will still be difficult to draw firm conclusions, as the counterfactual is bound to be uncertain. But it will certainly provide fertile ground for future PhD theses.
The full speech, given in Barcelona and addressed to the European Economic Association, available here.
Related links:
‘Too early’ to judge effect of Bank strategy – FT
The interest rate disconnect – FT Alphaville
If a central banker screams in a forest… – FT Alphaville