QE As Conventional Policy

QUANTITATIVE easing, which almost no one had heard of five years ago, is the great new discovery in macroeconomic policy. Policymakers put their faith in it as the engine of recovery; variations in the quantity of money supplied by the central bank has graduated from an emergency measure to a permanent tool. As Adam Posen recently put it, given the failure of interest-rate policy alone to determine the economy’s credit conditions, future central bank governors ‘will have to make unconventional monetary policy conventional’.

The quote above comes from a recent article on The Economist Free Exchange site. While it might appear at first blush that it is an endorsement of QE, in fact the author displays what I take as skepticism towards the tool. Fortunately he links to an article by John Kay which deals with the subject in a bit more depth.

While he seems disinclined to jump on the QE bandwagon primarily because there seems to be little consensus as to how it is supposed to work and if indeed it does work. He concedes that the theory that QE would boost asset prices seems to have been vindicated, but questions, rightly, whether the distributional effects are acceptable and if indeed it promotes economic growth. A booming US stock market versus paltry economic growth would seem to vindicate his wariness. The last paragraph of his article suggests a reason for the popularity of QE in some spaces.

Why has so much attention been given to these monetary policies with no clear explanation of how they might be expected to work and little evidence of effectiveness? The very phrase “quantitative easing” seems designed to discourage non-technical discussion. But the real answer, I fear, is all too familiar: these policies may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.

How we exit from QE is still an unanswered question. Economists assure us that they know the way out, which seems a bit speculative as they have never done so and are murky on the modes in which it works within the economy. Lots of “unknown unknowns” floating around here, which at least leaves the door ajar for unpleasant surprises. We know now from experience that the hint of slowly exiting does not sit well with the equity markets and if QE has worked to inflate that particular asset then it seems reasonable that exit is going to involve some disinflation. The push to go really slow or go later is going to come from a pretty influential sector if exit does throw a monkey wrench into their game.

I hope we can work our way through this great experiment, from beginning to total end and then take some time to gauge the efficacy of the policy. It may be effective and benign but it would be nice to know that’s the fact before we whip it out at the first sign of the next recession.

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