Even the Fed Admits QE Doesn’t Work
- The theory behind Quantitative Easing (QE) is “not well-developed”
- The evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes are “mixed at best”
- “All of [the] research is problematic,” Williamson continues, as “there is no way to determine whether asset prices move in response to a QE announcement simply because of a signalling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate.” In other words, it could be that the market is just reading QE as a signal that rates will stay lower for longer and that read is what drives market behavior, not the actual bond purchases.
- “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. [Background.] For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.”
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