Four Stories of Quantitative Easing

Abstract

entral banks typically conduct monetary policy through control of short-term nominal interest rates that can potentially affect the economy through a variety of channels. Because inflation expectations do not immediately react one for one to changes in nominal interest rates, central banks can also control real interest rates, at least over the short to medium term. The typical assumption is that monetary policy changes real (inflation-adjusted) short-term rates to influence economic decisions through their effect on other asset prices. That is, real interest rates will change asset prices in such a way as to change the willingness of banks to lend, firms to invest, or individuals to consume or invest in housing. Thus, a change in short-term real interest rates potentially influences the level of output and employment. Because people can always hold currency instead of depositing it in a bank, short-term nominal interest rates cannot go (much) below zero, which limits the effectiveness of conventional monetary policy. 1 Concerns about the consequences of the zero bound for interest rates date at least to Keynes (1936), and many observers have believed that central banks are helpless when short-term rates are near the zero bound. Many others, however, have argued that central banks can influence prices and output even when short-term rates are near their zero floor by increasing liquidity, particularly by purchasing long-term assets. For example, Mishkin (1996) This article describes the circumstances of and motivations for the quantitative easing programs of the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan during the recent financial crisis and recovery. The programs initially attempted to alleviate financial market distress, but this purpose soon broadened to include achieving inflation targets, stimulating the real economy, and containing the European sovereign debt crisis. The European Central Bank and Bank of Japan focused their programs on direct lending to banks-reflecting the bank-centric structure of their financial systemswhile the Federal Reserve and the Bank of England expanded their respective monetary bases by purchasing bonds. (JEL E51, E58, E61, G12)

Global corporate bond issuance: What role for US quantitative easing?

“…Figure 1 shows that volumes of corporate bond issuance 2 See Fawley and Neely (2012) for a description of unconventional monetary policy measures of major central banks.…”

The Relation of Brexit with the UK’s QE Decisions and its Impact on the Eurozone

“…According to Fawley and Neely (2013), the UK QE2 began in February 2012. During QE3, which started in July 2012, there was a new split of maturities into horizons of 3-7 years, 7-15 years or more than 15 years.…”

An Analysis of the Literature on International Unconventional Monetary Policy

“…5 Other central banks also pursued unconventional policies. Fawley and Neely (2013) detail the quantitative easing programs of four major central banks: the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan during the recent financial crisis and recovery. All of these central banks initially pursued unconventional asset purchases to alleviate financial market distress, but their goals soon broadened to include achieving inflation targets, stimulating the real economy, and containing the European sovereign debt crisis.…”

“…unconventional policy between central banks make it difficult to generalize across their effects (Fawley and Neely (2013)). Therefore, this paper focuses specifically on the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy.…”