Reaching for QE3 and Then Postponing Tapering

Abstract

Chairman Ben S. Bernanke’s Jackson Hole speech of August 31, 2012, turned out to set the course for the rest of his second term, importantly signaling the content of his legacy.¹ He stressed the socially debilitating repercussions of sustained high joblessness. He noted the valid point that both the potential inflationary and exit costs of the Fed’s balance-sheet policies upon careful examination were minimal. But he then repeated his earlier claims about the benefits of past QE policies, mentioning a “substantial body of empirical work on their effects” and calling their effects “economically meaningful” (p. 6). He made only a brief passing mention of the relatively new empirical evidence, such as contained in the aforementioned paper by Jonathan Wright. That work suggested that the economic effects of two rounds of large-scale asset purchases (LSAP) and one of operation twist were weaker as well as less persistent than Bernanke had asserted previously. Bernanke contended that:

[T]he estimated macroeconomic effects depend on uncertain estimates of the persistence of the effects of LSAPs on financial conditions.¹⁷ [Footnote 17: For example, while the macroeconomic effects reported by Chung and others (2012) are consistent with the persistence of financial effects as estimated by Li and Wei (2012), Wright (2012) finds much less persistence using a different methodology. Kiley (2012) also provides arguments and evidence for why LSAPs may have been less simulative than found in Chung and others (2012) and Fuhrer and Olivei (2011).] Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks. (p. 8, emphasis added.)²