Ben Broadbent, the Bank of England’s Deputy Governor for Monetary Policy, addressed the Society on the history of the UK’s experience of quantitative easing in a special - and particularly well attended - evening meeting held at Ashurst on 23 July. SPE Chairman Kevin Daly hosted.
The idea of quantitative easing (QE) was not new, Dr Broadbent began, noting the discussion of large scale asset purchases in Friedman and Schwartz’s influential 1960s book on the history of US monetary policy - a book which radically changed perceptions of what such policy could and could not do. And that in turn followed on from Keynes’ 1930 Treatise on Money which even back then suggested lower long term rates could be generated by central bank purchases.
Judging the impact of recent QE programmes, however, is difficult Dr Broadbent argues. Experimentation is not possible in macroeconomics and such policies have been a reaction to - rather than a cause of - events. But it was observed that unlike the Great Depression, bank deposits did not collapse this time, industrial production didn’t halve and unemployment didn’t rise to 30%. While it is not possible to isolate QE as the cause of this less pernicious outturn, it was better than risking the alternative of doing nothing.
There are various ways to test the impact of central bank asset purchases, with the negative announcement effect on government bond yields being easier to discern than any positive impact on equity prices. The impact of QE, it was argued, will change over both time and economic conditions. Dr Broadbent quotes a recent study by Weale and Weiladek that suggests asset purchases worth 1% of GDP add between a fifth to a third of a percent to GDP in the UK and US. As for asset prices, Broadbent suggests that QE prevented house prices from falling further rather than sparking a boom.
Given the downside impact of QE on yields one might have expected a sharp upward response to yields in the US as the Fed announced quantitative tightening (QT) from early 2017. Event studies (based on bond market reactions half an hour after announcements) show otherwise, however. Why the difference on the way in to QE versus on the way out? Dr Broadbent suggests the “novelty value” of QE was important in reducing rates initially and that purchases matter more when markets seize up than when they are operating normally.
Moreover, the Fed - he notes - has gone out of its way to stress that balance sheet shrinkage implies lower short rates than would otherwise have been the case. This sent a different message to the markets than during the 2013 taper tantrum, thereby dampening the effect of the QE roll-off on bond yields. Dr Broadbent said that the Bank of England would eventually do the same - decisions on Bank Rate, the BoE’s primary tool for altering policy at the margin, would take into consideration QE unwind when eventually that came to pass.
With thanks to Ashurst for hosting the event.
George Buckley, Vice Chair SPE
