What is the evidence on quantitative easing?

From the comments, Stephen Williamson quotes/writes:

“…but it’s not nearly a close enough engagement with the evidence, which does pretty clearly show some short-run effects [from QE] are still operating, even if those effects are diminishing with time.”

I’d be curious to know what “evidence” it is that “clearly” shows this. My guess is you’re making this up.

In the first part he is quoting me, the “I’d be curious” paragraph is his own words.  Overall, I would say here that the word “guess” is an accurate, albeit unfortunate description of how he is assessing the relevant evidence.

The background story is that Steve is arguing that QE should be deflationary rather than expansionary.  What does the evidence say?

Here are Krishnamurthy and Vissing-Jorgensen on the United States (pdf):

…evidence from inflation swap rates and TIPS show that expected inflation increased due to both QE1 and QE2…

On Japan, here are Girardin and Moussa:

…we propose new empirical evidence supporting the ability of quantitative easing to provide stimulation to both output and prices.

Or try Joyce, Miles, Scott, and Vayanos, from The Economic Journal:

…a growing literature has begun to provide estimates of the macroeconomic effects. In one of the first studies of this nature, Baumeister and Benati (2010) estimate a time-varying parameter structural VAR to investigate the macroeconomic impact of lower long-term bond spreads during the 2007–09 recession period. In all, the countries they analyse – the US, Euro area, Japan and the UK – they find a compression in the long-term yield spread exerts a powerful effect on both output growth and inflation and their counterfactual simulations indicate that unconventional monetary policy actions in the US and UK averted significant risks both of deflation and of output collapses.

p.F285 of that paper discusses some other literature in detail, again indicating that QE increases the rate of price inflation.  This piece is also useful for showing how empirical studies of QE provide decent evidence for asset segmentation and “preferred habitat” theories of bond markets (which responds to another of Steve’s points).

Or try Chung, et.al. from the Fed (since published in the JMCB):

…we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.

This is all consistent with the observation from Scott Sumner:

For God’s sake the dollar fell by 6 cents against the euro on the day QE1 was announced! Does anyone seriously think a 6 cent depreciation in the dollar is deflationary?

There is plenty of (justified) debate as to how strong these effects are, and we all know the difficulties of doing proper empirical work in macroeconomics, and on top of that the time to produce research means these papers are not analyzing the very latest data.  But I cannot find a serious — or for that matter non-serious — empirical study suggesting that QE is deflationary in its impact.

Addendum: David Glasner makes a very good point: “…if Williamson’s analysis is correct, the immediate once and for all changes should have been reflected in increased measured rates of inflation even though inflation expectations were falling. So it seems to me that the empirical fact of observed declines in the rate of inflation that motivates Williamson’s analysis turns out to be inconsistent with the implications of his analysis.”


Of course. But shouldn't you be thinking about the long run in real terms? In the long run there's more to think about than the immediate artificials like deflation / inflation. When was the last time I read the word "incentives" in this context on this blog?

That's not really the point of the recent discussion. This is more of a response to an economist who has been trolling other economists by insisting that his description of a condition in which something occurs is an analysis of how it occurs. Other economists have wasted time by assuming that something deeper lies beneath.

That's a good answer. I'm not sure I understand the cryptics, but, even so, it's a good answer.

'empirical study suggesting that QE is deflationary in its impact'

Considering that its very intention is inflationary, and that if its impact could any sense be considered deflationary, it would be stopped/replaced/changed, then it is unlikely that QE is actually deflationary by any reasonable measure.

Whether, however, QE is actually adequate to combat deflation - by various definitions of deflation - is an entirely different subject. Pushing on a string comes to mind as one of those beguiling metaphors from just a couple of years ago.

The zero bound is now real, and we are living next door to it. And if zero interest doesn't work as a tool, the ECB has also noted the possibility for 'penalty interest' -

'Die Europäische Zentralbank (EZB) hält den Leitzins stabil auf niedrigem Niveau und bekräftigt gleichzeitig ihre Bereitschaft zu einer weiteren Lockerung ihrer Geldpolitik. "Wir sind bereit und fähig zu handeln", sagte EZB-Präsident Mario Draghi. Es stünden verschiedene Instrumente zur Verfügung. Auf der Sitzung der EZB-Spitze habe man auch kurz über die Möglichkeit eines Strafzinses gesprochen.

Das wäre der Fall, wenn die Währungshüter den sogenannten Einlagesatz, den Institute normalerweise bekommen, wenn sie Geld bei der EZB parken, von derzeit 0 Prozent senkten. Faktisch würden damit die Banken für Guthaben bei der EZB Zinsen zahlen müssen, anstatt welche dafür zu erhalten. Ziel eines solchen Schrittes wäre es, die Geschäftsbanken zu drängen mehr Kredite zu vergeben, statt das Geld bei ihr zu bunkern.' http://www.n-tv.de/wirtschaft/EZB-haelt-Leitzins-stabil-article11856956.html

If you are right and QE is not adequate to prevent deflation this is excellent news. We can now retire all the government debt by printing money with no inflationary consequences. And if still no inflation, lets print enough to make everyone a millionaire. Talk about a free lunch.

The Dog That Didn't Bark

Is one

That Could have bitten.

Just avoiding deflation, and signaling to trading partners that their pursuit of currency relative devaluation by purchasing large quantities of US bonds could end badly, and therefore should be curtailed, doesn't cost us much.

For now.

The Dog That Didn’t Bark

Is one

May not exist

Not to pick a fight, but, I hate this tactic. It is no different than saying, "My garden is free of killer rabid giraffes because I used giraffe repellent!" It is a classic logical fallacy. Maybe doing nothing would have resulted in a collapse of asset values from which we never recovered. Maybe it would have triggered a world wide zombie attack. We can't know any of that. What we do know is we have been getting something less than a dollar of GDP for every dollar of QE.

Sometimes you can tell what kind of it is dog when you see one.

Counterfactuals can always be challenging, but in this case, you only have to look to Japan in the 90's or the US in the 1930s to see what happens if you don't use monetary policy as a tool, along with fiscal policy.

If I step out in front of a fast moving car, and don't step back, I could assume that the car might have stopped, but I also know a little about physics and the number of deaths at that intersection. So I step back.

Most of the criticism of QE posits that it will be (very) inflationary in the long-term. The deflationary meme seems like a strawman.

I suppose QE might prove deflationary when (more likely if) it is withdrawn - and by withdrawn I mean reversed, not just tapered or reduced.

It is not surprising that there is no empirical work on this latter phenomenon: withdrawal is not taking place.

Its quite simple: if QE was completely ineffectual then market wouldn't react positively to it.
QE will go down as one of the most successful monetary experiment ever.

'QE will go down as one of the most successful monetary experiment ever.'

'It is too soon to say.' - attributed to some dead Communist

This is the blinding light of the meritocracy. Brilliant minds banding together to create niche "products," backed with VC money borrowed at 0%. Make the app and get taken out by a bigger player - get rich. Forget the concept of "career" - make your money hard and fast. 0% rates forever babee!

And yet commodity prices are falling.

The money that the fed is creating isn't showing up, or rather hadn't shown up in the us, but rather has forced a counter reaction from exporting asian nations, where they are forced to print to keep their currencies low. The vast export markets of europe and the us aren't there for these economies to keep growing, so they print, both in the race to devalue and the desire to keep the restive crowds busy.

Back in the usa, Amazon, who still doesn't make any money, can fund growth through the frothy stock market. Zero returns except that the central banks keep on printing.

The question to ask about price fixing schemes isn't whether they are inflationary or not. It is possible to fix prices. The longer the fixing goes on, and the more unassailable the fixer, the more permanent the scheme becomes. QE is now permanent, as permanent as the US Federal reserve. The question isn't whether it is good policy or not. The question is whether the cost of backing out is higher than the harm stemming from the policy.

What harm? If the us wants to screw around in the economies of large and nominally hostile nations, they better maintain a very strong navy.

The caveat is that no price rigging scheme is permanent. All of them eventually unravel. Knowing when is the key to great wealth, as we saw with the mortgage bubble.

I don't agree with your Amazon comment. Amazon chooses to fund its growth by reinvesting its profit. Gross Profit Margin is on the rise. http://ycharts.com/companies/AMZN/gross_profit_margin

All I can think of for how QE could lead to deflation is if enough other nations over-reacted to it such that the dollar appreciated on net. It'd be like if your nation upped defense spending to become more powerful, but that directly led to most other nations upping spending even more.

I'm not sure I understand Stephen's position, but in any event market reaction is a poor proof (or disproof) of anything. There's no question that most market participants believe QE to be inflationary; they have it on good authority from economists. It's tautology to use their reaction as 'proof' like Scott does.

QE may nevertheless lead to actions that are deflationary in the long run. I'm not sure that liquidity premia is the right story, but it's become entirely too easy to blame interest-on-reserves for poor QE results. It's not just banks hoarding.

Really, this is a great example of people overthinking and being confusing for the sake of being interesting. I saw a great quote the other day which applies here; if you can't convince them, confuse them. Printing money is inflationary, no doubt about it, its almost a tautology. Just because there are other things going on in the economy does not change that fact. The only question is how inflationary is a given amount of QE. This has been the mistake of CB recently, they are scared of over inflating, so they are doing too little and sending strong signals that if they see inflation they will withdraw the stimulus. As Scott Sumner says "solve this by targeting the forecast".

we need deflation.

Pop the re-inflated housing bubble and stop the mass immigration.

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