Even central bankers struggle to provide proof that QE works

Today is ECB day with its President Mario Draghi taking centre stage at its press conference later on this afternoon. That is unless he is asked a particularly awkward question in which case the afternoon nap of Vice President Constancio is disturbed. In terms of actual decisions I do expect the ECB to extend its QE beyond program beyond next March but central banks tend to act when they have a new set of economic forecasts and they are not due until the December meeting. Also on the QE point we have in a way already been told. Here is Mario from the last press conference.

And I remind you again that our programme is meant to run to the end of March 2017 or beyond if necessary.

Today I wish to examine one of his other claims from that press conference.

So I would conclude that our policy has been very effective.

There is an obvious moral hazard in him reviewing his own policies and declaring them successful and when pressed for detail even he only made relatively small specific claims.

I think it’s 0.5% over the forecast horizon as far as growth is concerned, and I think it’s 0.3% as far as inflation

We can review the overall concept via a Working Paper on the subject issued by the Bank of England yesterday. However we need to note first that there is a large moral hazard here. After all the Bank of England is being judge and jury on itself. Also what do you think would happen to the careers of Andrew G Haldane,  Matt Roberts-Sklar,  Tomasz Wieladek  and Chris Young if they concluded that QE had not worked?

The QE experience

Accordingly our four intrepid economists must have had sweaty palms and a fast heart beta as they reported this.

Even in models which admit some role for central bank balance sheet expansions, the channels through which QE works are still the subject of debate, academically and practically.

Even worse this.

Schematically, the transmission mechanism for QE can be thought to comprise two legs: an expansion of the central bank’s balance sheet, creating new reserves to purchase short-term bills; and a maturity extension programme, swapping these bills for longer-term bonds. In many standard macroeconomic models, neither leg has an effect on economic activity.

Ah so that is why the Bank of England changed its economic models!

Along the way we also get a confession that it makes the rich well richer.

This would tend to put upward pressure on the prices of those assets.

So what do they conclude then?

We are told this.

It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions.

Actually for the effort involved the impact is rather small.

Looking across the first £375bn of Bank of England QE, Meaning and Warren (2015) estimate that QE reduced yields by around 25bps. ( They mean UK Gilt yields).

Anything else? Er well yes.

QE announcements are, in general, associated with higher equity prices……Over this period, asset prices movements were much more pronounced. ……..And there was a sustained rise in the FTSE index of around 50%. It would be heroic to attribute all of these gains to QE, but it seems plausible it made some contribution.

I think that it is true that expansionary monetary policy of the sort we have seen has boosted equity prices considerably but being specific is very difficult. For example how much is down to lower official interest-rates and how much to QE? We know that cash will have been looking for a home and some will have gone to equities but then the trail gets colder.

How does this boost the real economy?

Things get more difficult and I wonder whether to laugh or cry as I read this bit.

Anything economic agents learn about the path of future monetary policy.

What did they learn from the Forward Guidance of the Bank of England which promised interest-rates rises and then cut them? Here is former Bank of England policymaker Adam Posen demonstrating his forecasting skills from February about an EU leave vote.

And if it occurred, you’d probably see very high interest rates,

If we move to the US whatever happened to the 3-5 interest-rate rises that were hinted at back at the start of 2016. So this gain is singing along to Mariah Carey.

But it’s just a sweet sweet fantasy baby

If we move onto other possible connections we get heavy going and the working paper ends up admitting this.

The effectiveness of QE policies does vary, however, both across countries and time.

Indeed this bit looks a little desperate.

QE improves the economic outlook/reduces risk of bad outcomes (via any mechanism)

Especially as it apparently needs some sort of confidence fairy.

People need to believe QE will improve the economic outlook.

Ah, so if it does not work it is all our fault for being non-believers? As to actual reasons for it working the issue is indeed troubled. There is also a blatant contradiction as you see we are told that part of it is by making other countries less competitive.

Impact on the exchange rate, through changing interest rate differentials and/or risk premia and long-term exchange rate expectations.

Yet those with the new less competitive exchange-rate are apparently winners too.

There is also evidence of strong positive international spill-over effects of QE from one country to another.

According to one of the research tables UK GDP benefits more from US QE than US GDP does! Also it appears that such research is taking the credit for nearly all the economic growth seen in the credit crunch era.

evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.

Actually the research admits that the UK gets more inflation than implied by this but for some reason omits to specify this. Also as the main author was one of those who implemented UK QE Martin Weale is hardly unbiased. Even so one of the slides tells us this.

These results are dependent on the parameters I have selected.

Anyway we are left with this conclusion.

There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.


This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.


We get a lot of central banker hyperbole about the apparent effectiveness of their policies. One subject they skip is why more than 7 years down the road we need ever more of it!?That sounds more like a snake oil sales(wo)man than someone with any sort of fix or cure. An example of this was provided by the UK Chancellor Phillip Hammond only yesterday.

An easier monetary policy in this country over the past six years has also delivered us 2.7 million jobs and there will be a lot of people out there today who may not own assets, but do have a job that they may not otherwise have had.

Sadly it did nor appear to be challenged. Meanwhile obvious problems such as QE benefiting the already wealthy find that they are kicked into the long grass.

This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.

Until after they have retired? Also I note that the distributional problems are somewhat breath-takingly being placed at the hands of government leaving Mark Carney and the Bank of England singing along with Shaggy.

She saw the marks on my shoulder (It wasn’t me)
Heard the words that I told her (It wasn’t me)
Heard the scream get louder (It wasn’t me)

If we consider the UK Gilt market and likely inflation it is plain that it is at completely the wrong level. From this mis- pricing there are maybe more costs than benefits.

Me on TipTVFinance

19 thoughts on “Even central bankers struggle to provide proof that QE works

  1. Hi Shaun
    I think the following link might be
    pertinent to both today’s subject and yesterday’s
    question on increased numbers of unemployed

    I wonder if any central bank has ever used computer
    algorithms in any decision making?


    • Ian

      Many thanks for a brilliant presentation by Jason Cummins. I would have loved to see a picture of the audience!

      He shows the utter insanity of the Fed trying to raise rates when this will specifically go against their mandate re inflation and growth. Bonkers on stilts.

      I actually think that if the insanity of NIRP ever got down to the ordinary saver then I think time would be called on the central bankers and the politicians would intervene because I can’t see them being able to implement that without capital controls and that is a political matter, not one of monetary policy.

      On Tip TV with Shaun Zak Mir said that he thought Carney might be gone by the end of the year. I don’t think that but it wouldn’t at all surprise me if he isn’t gone in the next year.

      • The Fed is looking at the global situation too particularly emerging markets and trying to do what’s right for the majority whilst simultaneously looking into the future trying to gain some policy space ready for when the next downturn arrives, rather than acting in myopic self interest. They are not isolationists.

        • Where is this concern for the global situation in the Fed mandate? They are legally required to be “isolationists”; anything else is an excuse not to raise rates.

      • You have confused the mandate with what they are actually doing, they have extended their considerations although not mandated to do so. In other words they are not slavishly following “the rules” like little robots but are simultaneously achieving compliance with the mandate in the long term .

        By your own admission if the Fed follows it’s mandate slavishly and narrowly then it does not make sense at the moment to raise rates if looked at myopically.

        If the longer term domestic view is taken they currently have nowhere to go with monetary policy when the next domestic recession arrives so, in compliance with their mandate they are also trying to create policy space now to enable them to comply with their mandate in the future.

        • No; the confusion was in your original comment.

          The Fed quite rightly is entitled to pay attention to global developments as they have a knock on effect to the US and may affect the US down the line. This is within their mandate if trite.

          You implied that they tailor their actions according to the effect they may have outside the US (“trying to do what is right for the majority”) and this is outside their mandate but it does give them excuses which is the reason they invoke it.

          You obviously haven’t seen the video; the presenter Jason Cummins does not see the Fed in the light you portray at all; he says quite rightly that their models are wrong and they have no clue.

          The point is not that they are not following the rules slavishly; the point is that there are no rules.

      • I had already seen seen the Jason Cummins speech prior to my first comment. He talks of lack of consumer demand and business investment over the last year but makes no mention of the US Juglar business investment cycle which had been in an upswing prior to a collapse in oil price which made it pause as he correctly identifies the collapse in oil investment but is now recovering as may be seen via the US Equipment Investment and output chart here – http://static1.1.sqspcdn.com/static/f/153565/27299527/1477048807327/161021-Chart-1.gif?token=LJtAwRUbgzHTKm12LtbRMKzzxQ0%3D which, whilst still negative clearly shows an upward trend and the US mining and drilling investment here – http://static1.1.sqspcdn.com/static/f/153565/27299528/1477048905670/161021-Chart-2.gif?token=XG%2FVXuTRXSULa58Pte12YSfbrlo%3D
        which shows negative investment currently in exploration, hardly surprisingly but also an explosion of industrial output oil and gas well drilling suggesting overall structures investment has returned to a positive number. It is my view that commodities have reached their nadir and are now in a recovery phase including oil although it will not move a lot higher but enough to encourage more US shale activity. The items I mention cover approximately 65% of US business investment whilst the balance is attributable to software and R & D which rose 4% in y/e June 16.

        Meanwhile, in answer to his assertion that consumers are no longer consuming American GDP increased 1.4% in Y/E June 16 and narrow money growth (a leading indicator in future consumer expenditure intentions)has been growing strongly since Summer 16 following a previous fall in growth from Spring to Summer 16. For these reasons I am unconvinced by Cummins argument that consumers aren’t consuming preferring to save instead and businesses are not investing.

        Regards Fed models, I have not seen their models so am not prepared to comment but I do know what I have presented here which flies in the face of Cummins argument re consumer and business investment retrenchment.

        There is nothing excuse like about keeping a wary eye on EM developments when negative events there (caused e.g. by increasing Fed rates too quickly, not allowing a chance for EM corporates to re finance $ loans in native currency) can spill over to the US economy. I call that far sighted and responsible behaviour. and as I said before they continue to pursue their mandate of price stability, maximum employment and moderate rates and you may wish to note that they have no mandate re growth.

        If you want to argue that they didnt meet their target of 2% pa inflation well of course they didn’t!It’s naive to think that any economy will always operate at optimum inflation and employment settings. What they are doing is trying to get the economy there.

        By the way earnings growth rates were 2.5% whilst inflation hovers around 1% suggesting upward pressure on inflation which in turn suggests another rate hike by year end would be advisable rather than waiting for excess inflation to arrive and then begin frantically hiking. Oh, and I never said or implied they were following rules slavishly, I said they were applying them, there is a difference but as I have just amply demonstrated they are still following their mandate if not achieving it optimally.

  2. Define by what you mean by ‘work’? I would suggest the suppression of yields and intended inflationary aspects is somewhat dwarfed by its true purpose of floating assets and making ‘good’ the banks – probably the Central Banks’ main remit in the last decade.

    Of course, we’re always faced with the counterfactual. I still would have liked to have seen mass bank bankruptcy over a weekend, then re-open the doors on the Monday following recapitalisation. Those who gained from the credit inflation would get their come uppance. Banks could continue to lend instead of QE’ing. Quick, swift and fair. Instead we’re faced with this torture, unfairness, capital misallocation and increasingly, political upheaval.

    • Hi Hotairmail

      I was sticking to my usual position of impact on the real economy. But what we get in response are assertions from those who enacted the policies. How on earth did we ever have recoveries in the past?

      I agree that it would have been better if the UK has let Northern Rock fail but protected the depositors. We do not know what would have unfolded at RBS but the directors would have been made to get a grip rather than being completley out of touch even as it folded according to the then Chancellor Alistair Darling.

  3. Shaun, I noticed that Martin Wolf was on the FT comments section defending CB’s their policies of Low Rates and QE this week. As usual MarkGB gave him a well recommended rebuke. There is a lot of criticism surfacing and they are on the back foot. Theres no need to unwind the QE, just raise interest rates to a normal level and aĺl the “asset wealth” will be destroyed. We may have difficulties persuading the CB’s to voluntarily increase interest rates. Lets hope we dont waste the next crisis to reform Govt, leadership and economic models.

    • Hi Paul

      Martin Wolf is in some ways a strange character. He sometimes gets a grip but then loses it. For example there is some truth in his argument that global imbalances contributed to the credit crunch but then he supports policies which for example have allowed Germany’s trade surplus to grow.

      Also how do ever lower interest-rates solve the problem of “the excessive build-up of private debt” ? Also here he just chants an unsubstantiated mantra.

      “Moreover, to the extent that low rates promote recovery, almost everybody benefits.”

      Perhaps he means almost everybody he knows! There are dangers in trusting Wikipaedia but this about the husband of Baroness Wolf of Dulwich rings true.

      “Wolf is regarded as “staggeringly well connected” within elite financial circles.[1] His friends include leading financiers such as Mohamed A. El-Erian; politicians such as Manmohan Singh, Timothy Geithner and Ed Balls; many leading economists; central bankers such as Mervyn King: according to Wolf, he knows all significant central bankers”

      • Shaun thanks for the insight. His friends confirm for that this is “groupthink” self reinforcing and an element of all powerfullness egotism thrown in too. Who are we to suggest the CBs are wrong and they surely know the consequences if they are found out wrong. That is why the disciples are now lining up in defence for they are all culpable and have enjoyed personal financial or non financial reward for the past 8 years.

  4. In my opinion, QE is an absolutely classic case of group think and of a slippery slope. It went something like this:
    1. Ten years ago, “printing money”, as it was then known, was immediately followed by the words Weimar Germany and Zimbabwe;
    2. All central banks thought that this was the stuff of the devil;
    3. Following the financial crash, a lot of government money went into bail-outs and central bank money went into pumping liquidity into the system, blurring the edges between banks (central or otherwise) and the taxpayer;
    4. At some point, it was realised that governments could spend money and run deficits without pushing up the borrowing costs if the brand new concept of “quantitative easing” was initiated. No mention of Zimbabwe/Weimar Germany, just the rather reassuring concept of things being eased;
    5. Rather agreeably, interest rates came down, forcing asset prices up and cutting costs of financing government debt;
    6. This was “of course” only limited to existing debt instruments, as it would be too shocking to think of that other Zimbabwe word, “Monetising” debt;
    7. This would be limited in time and quantity and asset class;
    8. This all seemed to be rather agreeable and the CBs of the USA/Japan/UK and the ECB could all meet around the world and slap themselves on the back for their ingenuity;
    9. The limits on time, amount and asset classes were quietly forgotten, as Japan started buying shares and the ECB increased buying to 80 billion a month;
    10. Amazingly, the press didn’t notice or care about this;
    11. Debt instruments only a week old became “existing debt”;
    12. With such low interest rates, governments then launched incredibly long-dated securities;
    13. And that brings us to today. We are loaded down with debt owned by CBs. We have no plan to reduce this. Japan’s CB will soon be the largest shareholder in a third of large Japanese companies. Interest rates have cratered all returns on savings. House prices assume almost zero cost of borrowing. Deficits are still huge.
    And so, Shaun, the central bankers are saying it works because:
    1. They got us here in the first place;
    2. It sounds reassuring;
    3. The inevitable shock of reality is kicked down the road;
    4. They have no way out (or indeed a plan in concept to get out);
    5. The figures are so large that it’s better just to shut your eyes and ears and pretend that it will all sort itself out.

  5. If the true aim is palliative care of the status quo, or, in other words, if kicking the can, isn’t the means but THE END, then CBs would rightly say their actions are working.

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