Abstract
Since the ultimate objective of quantitative easing is to stimulate economic growth and keep price stability, this chapter further assesses the wider effects of QE on a range of economic indicators, in particular output and inflation, in an attempt to address the research question of what would have happened to these major advanced economies if the unconventional monetary policies had not been undertaken by their respective central banks, i.e., the no-QE counterfactuals. Following the established methodology in the literature, we use large Bayesian vector autoregression (BVAR) models to estimate the impact of QE on the wider economy by assuming that the macroeconomic effects of QE work entirely through its impact on government bond yield spreads (see, for example, Kapetanios et al. 2012; Lenza et al. 2010; Baumeister and Benati 2010). More specifically, we produce no-QE counterfactual forecasts using large BVAR models by adjusting the spreads between government bond yields and the 3-month Treasury bill rate in accordance with our empirical findings presented in the previous chapter. The no-QE counterfactuals are then compared with their corresponding baseline forecasts which incorporate the effects of QE on government bond spreads. The difference between the two scenarios is considered as the broader economic impact of the unconventional monetary policies.
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Notes
- 1.
The link between government bond spreads and macroeconomic variables is discussed in detail in Estrella (2005).
- 2.
Kapetanios et al. (2012) argue that, in general, simple autoregressive or random walk models produce reasonable forecasts for macroeconomic and financial variables.
- 3.
The analysis of unconventional monetary policies by Lenza et al. (2010), therefore, is concerned with the impact of a reduction of interest rate spreads given the level of the key policy rate, rather than changes in the key policy rate itself.
- 4.
Kapetanios et al. (2012) also conduct some sensitivity analysis by allowing the size of the adjustment on government bond spreads to vary over the forecast horizon, but the results under various spread adjustment profiles are broadly similar to the baseline results.
- 5.
Kapetanios et al. (2012) point out that the macroeconomic effects of QE may depend on the channel through which it affects bond yields, i.e., through term premium or expected future policy rates.
- 6.
In response to the recent global economic crisis, the standard rate of VAT in the UK is reduced from 17.5 to 15 % with effect from December 1, 2008 to encourage consumer spending. The cut in VAT is reversed to 17.5 % with effect from January 1, 2010. Following the election in 2010, the new coalition government raises the standard rate of VAT from 17.5 to 20 % with effect from January 4, 2011, in an attempt to tackle the country’s record debt.
- 7.
The maximum effect of the Bank of England’s QE on UK CPI inflation would be much greater if it is defined as the difference between the no-QE counterfactual and the actual data, as the model underestimate inflation in the UK over the forecast.
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Hausken, K., Ncube, M. (2013). Broader Economic Effects of Quantitative Easing. In: Quantitative Easing and Its Impact in the US, Japan, the UK and Europe. SpringerBriefs in Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-9646-5_5
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DOI: https://doi.org/10.1007/978-1-4614-9646-5_5
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