Quantitative Easing: Explanation and Resources

Monday, 22 July 2013

Scroll down for links to official central bank materials and research papers.

What Is QE? Basic Questions and Answers

What is QE and who does it?

Quantitative Easing (QE) is a monetary policy tool, widely used by major central banks (US Federeal Reserve, Bank of England, European Central Bank, Bank of Japan) after the financial crisis of 2007-2009. The Bank of Japan has been doing QE already since March 2001.

How exactly is QE done?

The central banks purchase financial assets from commerical banks and other private institutions, such as insurance companies and pension funds. Therefore QE is also often referred to as “asset purchases” (although obviously not all “asset purchases” are QE).

Which assets do the central banks purchase?

The assets include particularly, but in some cases not only, government bonds (such as US treasury notes or UK gilts), mortgage-backed securities, and corporate bonds.

One difference of QE vs. more traditional monetary policy tools (besides the wider range of asset types) is that the time to maturity tends to be longer with QE (e.g. 2-10 year treasury notes or even 30-40 year JGBs).

Why is QE done? What is the mechanism and what are the goals?

The immediate objective and desired effect of the asset purchases is to increase the demand for the assets being purchased, which should result in an increase in their prices and decrease in yields (because there is an inverse relationship between price and yield of fixed income securities). This translates to general decrease in longer-term interest rates (QE targets longer maturities, as stated above), which should make loans cheaper and better accessible, increase nominal demand, and generally stimulate the economy and prevent deflation.

There are additional channels (with the same end goals), although the one described above should be the strongest one.

Why now? Why can’t the central banks just do more of their traditional tools?

From the mechanism and goals above you can see that QE is in fact not that different from the more traditional monetary policy tools, particularly open market operations (technically QE can be considered a specific kind of OMOs). The important difference is in the tenor (time to maturity) of the interest rates that are directly being affected. The problem and the reason why QE is done now is that the potential of the traditional monetary policy tools, which target mostly short-term interest rates, is limited (close to non-existent) at the time when short-term interest rates are close to zero.

Furthermore, the effectiveness of traditional monetary policy measures can be constrained due to (commercial) banks trying to strengthen their balance sheets or credit markets lacking confidence after the financial crisis.

Does QE equal manipulating the markets / economy?

It depends on your definition of “manipulating”. In fact, any economic policy by central banks and governments (including monetary policy, fiscal policy, and regulatory activities) does affect (= manipulate) the economy and financial markets. The question is whether such manipulation is good or bad, or whom it benefits (and who pays for it). There are of course different opinions on this, depending mostly on people’s general beliefs regarding the roles of the government and central banks in the economy.

In any case, increased prices of financial assets, such as stocks and bonds, are clearly stated as an important intermediate objective in the transmission mechanism of quantitative easing (see for example the nice diagram on page 7 here).

Will the markets crash when QE ends?

There is no doubt that any change in QE does have significant effect on the global financial markets, not limited to the particular domestic country. Changes in QE have been among the most powerful market moving events in the last years. Nevertheless, it is impossible to predict the extent of future market impact, as we don’t know how exactly the “QE exit” will look like and what the macroeconomic environment will be at that time. Moreover, as with everything concerning monetary policy, the sole anticipation of a change can move the markets as much as the eventual change itself (as we saw in June).

Official QE Resources on Central Bank Websites

US Federal Reserve

The Fed monetary policy start page

Note: The Fed doesn’t like the term “quantitative easing” that much. QE is usually referred to as “asset purchase programs” and listed directly under open market operations.

Credit and Liquidity Programs and the Balance Sheet – details about all parts of monetary policy following the financial crisis

Details about asset purchase programs (when, what, how many billion) – under open market operations

Current FAQ: Why do the U.S. economic recovery and labor market require ongoing monetary policy support through the purchase of longer-term Treasury securities and agency mortgage-backed securities?

FOMC meeting calendars, statements, and minutes

Lectures, testimony, and speeches by Federal Reserve officials

Bank of England

BoE monetary policy start page

Quantitiative Easing Explained (links to more resources at the bottom of that page)

Quantitative Easing – How it Works (4 min. video)

Quantitative Easing Explained Pamphlet (pdf)

Monetary Policy Committee (MPC) decisions

MPC Minutes

Statements and speeches by MPC members covering QE

European Central Bank

ECB monetary policy start page

Press releases on monetary policy

Key dates of the financial crisis (since December 2005) – with links to related materials

Bank of Japan

BoJ monetary policy start page

Monetary Policy Measures – follow the links for materials concerning individual tools

Monetary Policy Meetings – schedule, statements, minutes, reports

Speeches related to monetary policy

Kuroda, Haruhiko: Quantitative and Qualitative Monetary Easing, Speech at a Meeting Held by the Yomiuri International Economic Society in Tokyo, 12 April 2013

Selected QE Research Papers

Sorted chronologically from newest to oldest.

Kandrac, John; Schlusche, Bernd: Flow Effects of Large-Scale Asset Purchases, Federal Reserve, 10 July 2013

Cho, Dongchul; Rhee, Changyong: Effects of Quantitative Easing on Asia: Capital Flows and Financial Markets, Asian Development Bank Economics Working Paper Series No. 350, June 2013

Mamaysky, Harry: The Time Horizon of Price Responses to Quantitative Easing, Citigroup, 12 June 2013

Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland: On the International Spillovers of US Quantitative Easing, ECB Working Paper No. 1557, May 2013

Faure, Alexander Pierre: Money Creation: Misconceptions: Quantitative Easing Creates Money, Rhodes University, 22 April 2013

Carpenter, Seth B.; Demiralp, Selva; Ihrig, Jane E.; Klee, Elizabeth: Analyzing Federal Reserve Asset Purchases: From Whom Does the Fed Buy?, FEDS Working Paper No. 2013-32, 12 April 2013

Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland: On the International Spillovers of US Quantitative Easing, DIW Berlin Discussion Paper No. 1304, March 2013

Fawley, Brett W.; Neely, Christopher J.: Four Stories of Quantitative Easing, Federal Reserve Bank of St. Louis Review, January/February 2013, 95(1), pp. 51-88

Reynard, Samuel: Assessing Potential Inflation Consequences of QE after Financial Crises, Peterson Institute for International Economics Working Paper No. 12-22 , 26 November 2012

Thornton, Daniel L.: The Federal Reserve’s Response to the Financial Crisis: What It Did and What It Should Have Done, FRB of St. Louis Working Paper No. 2012-050A, 30 October 2012

Thornton, Daniel L.: Evidence on The Portfolio Balance Channel of Quantitative Easing, Working Paper 2012-015A, Federal Reserve Bank of St. Louis, October 2012

D’Amico, Stefania; King, Thomas B.: Flow and Stock Effects of Large-Scale Asset Purchases: Evidence on the Importance of Local Supply, FEDS Working Paper No. 2012-44, 29 February 2012

Berkmen, S. Pelin: Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective?, IMF Working Paper, January 2012

Krishnamurthy, Arvind; Vissing-Jorgensen, Annette: The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy, Brookings Papers on Economic Activity, Fall 2011

Kolev, Gueorgui I.: Quantitative Easing Engineered by the FED, and Prices of Internationally Traded and Dollar Denominated Commodities and Precious Metals, EDHEC Business School, 2 September 2011

Bowman, David; Cai, Fang; Davies, Sally; Kamin, Steven: Quantitative Easing and Bank Lending: Evidence from Japan, Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 1018, June 2011

Tan, Ji; Kohli, Vaibhav: The Effect of Fed’s Quantitative Easing on Stock Volatility, University of California, Berkeley, 1 June 2011

Blinder, Alan S.: Quantitative Easing: Entrance and Exit Strategies, Federal Reserve Bank of St. Louis Review, November/December 2010, 92(6), pp. 465-79

Klyuev, Vladimir; de Imus, Phil; Srinivasan, Krishna: Unconventional Choices for Unconventional Times: Credit and Quantitative Easing in Advanced Economies, IMF Staff Position Note, 4 November 2009