Quantitative Easing Flashcards
Given the above, it could be suggested that the goals of QE were to: (4)
- Increase the availability of credit and reduce its cost.
- Increase asset values.
- Prevent an increase in the yields on government bonds.
- Increase output, inflation and employment.
Portfolio Rebalancing II
N.B. while the Bank of England base rate provides a benchmark for short-term interest rates, the ‘risk-free’ rate considered to be relevant for longer term lending is the ____ on government bonds of longer _______ (e.g. ten years).
- An institution such as a pension fund has a ‘________ ________’ of long-term assets, in order to partially match the maturity structure of its liabilities.
Therefore we might expect a pension fund to not keep ________, but purchase some other asset of similar maturity to the gilt which it sold - this could be a ________ ____(or perhaps securitized ________).
N.B. while the Bank of England base rate provides a benchmark for short-term interest rates, the ‘risk-free’ rate considered to be relevant for longer term lending is the yield on government bonds of longer maturity (e.g. ten years).
- An institution such as a pension fund has a ‘preferred habitat’ of long-term assets, in order to partially match the maturity structure of its liabilities.
Therefore we might expect a pension fund to not keep deposits, but purchase some other asset of similar maturity to the gilt which it sold - this could be a corporate bond (or perhaps securitized mortgage).
Signalling
What can be argued when the central bank announces a large quantity of asset purchases?
What can the announcement of a policy such as QE have effects of?
It can be argued that when the central bank announces (commits to) a large quantity of asset purchases this will persuade the markets/public that monetary policy will be used to keep interest rates low for a relatively long time (as otherwise it would imply losses on the asset purchases).
The announcement of a policy such as QE can have general confidence effects also, but these can go either way. It could be that confidence increases, in the belief that the central bank is ‘on the case’. It could be that confidence decreasezznn
QE - effects I
What is a common finding?
One difficulty is…?
The estimated effects of QE on long-term (10+ years) gilt yields vary between (a reduction of) 0 − 1 percentage points. The estimated effects of QE on long-term corporate bond yields vary between (a reduction of) 0 − 0.3 percentage points.
Estimates of the effects of QE vary, depending on the event (date) and the method used. A common finding for all of the effects is that they seem to have been larger when QE was first used (perhaps because it was more surprising), with ‘diminishing returns’ since then. One difficulty in estimating the effects is the issue of the ‘counterfactual’.
The estimated effects of QE on long-term (10+ years) gilt yields vary between (a reduction of) 0 − 1 percentage points. The estimated effects of QE on long-term corporate bond yields vary between (a reduction of) 0 − 0.3 percentage points.
QE - effects II
The effect of QE on general asset prices is… and why?
What might the effects have done?
The effect of QE on general asset prices is less clear: stock markets did recover (and grow) following the financial crisis, but studies vary in their estimates of the amount of this which is attributable to QE.
To the extent that QE did have some effects on asset prices, this might be expected to have uneven effects across the wealth distribution - i.e. those with assets will have benefited while those without assets will not have.
QE - effects III
What does QE serve to do?
What does available evidence suggest?
Why might this have been the case?
While QE did serve to recapitalize/reliquidize banks, by increasing asset values and enabling them to improve their reserve positions (offsetting the interbank ‘credit crunch’), the available evidence suggests that banks did not significantly increase their lending to corporate and retail borrowers.
Why might this have been the case?
Large companies, which can issue corporate bonds, will have experienced a greater easing of credit conditions than smaller companies, which tend to rely more on bank loans.
Recent evidence?
Most of the evidence summarized above relates to the early phases of quantitative easing, from 2009 - 2014 (approximately) - there is less evidence available so far on the effects of the very large purchases made from 2020. Note that this is a possible exception to the statement above that QE has ….
Most of the evidence summarized above relates to the early phases of quantitative easing, from 2009 - 2014 (approximately) - there is less evidence available so far on the effects of the very large purchases made from 2020. Note that this is a possible exception to the statement above that QE has become less effective over time.
Quantitative Tightening II
What are likely to be the effects of these sales?
However…?
Generally, the reverse of the effects of purchases: falling bond prices, falling prices of other assets (due to rebalancing) etc. Perhaps some improvement in general confidence, if taken as a signal that the economy is ‘okay’.
However, the scale of sales is intended to make these effects negligible, i.e. £7bn per month should not make a large difference to the total volume being traded in the secondary gilts market.
