Quantitative Easing and Its Impact in the US, Japan, the UK and Europe

verfasst von: Kjell Hausken, Mthuli Ncube

Verlag: Springer New York

Buchreihe : SpringerBriefs in Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This volume empirically analyzes the effects of quantitative easing (QE) on interest rates and the economy in the US, Japan, UK and Europe. Using an event-study methodology, the authors find that the measures undertaken by the Federal Reserve and Bank of England, which focus primarily on bond purchases, are much more effective in lowering interest rates than those undertaken by the Bank of Japan and the European Central Bank, which have relied more heavily on lending to private financial institutions. Using large Bayesian vector autoregression (BVAR) models they also analyze the impact of QE on the wider economy. They produce no-QE counterfactual forecasts that are compared with their corresponding baseline forecasts, incorporating the effects of QE on government bond spreads. Despite the failure of stimulating economic activities as a whole, the simulation results suggest that the unconventional monetary policies have a positive influence on industrial production in the US, UK and Japan. The authors’ analysis finds that QE contributes to the reduction in unemployment in the US and Japan, and a rise in inflation-expectations in the US, UK and Euro zone. However, evidence on QE’s effect on house prices, stock prices, consumer confidence, and exchange rate, is mixed and thus inconclusive.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

Since the advent of the financial crisis in 2008, some of the world’s largest central banks, namely the US Federal Reserve (Fed), the Bank of England (BOE), the Bank of Japan (BOJ), and the European Central Bank (ECB), among others, have embarked on monetary easing or quantitative easing. This is an unorthodox way of pumping money into the economy and aiming to lower the long-term interest rates in order to combat a recession. Since interest rates in industrial countries had declined to near zero in the aftermath of the global crisis, the scope for further monetary easing through lower policy rates became very limited. Quantitative easing (QE) and other asset purchase programs have therefore been adopted under exceptional circumstances. Japan is credited as the first country that started implementing QE in 2001. But it was not until the 2008 financial crisis that central banks of developed countries started using QE regularly to stimulate their economies, increase bank lending, and encourage spending. Refer to Tables 4.1, 4.2, 4.3, and 4.4 for a history of QE for the USA, the UK, Japan, and Europe, respectively.

Kjell Hausken, Mthuli Ncube

Chapter 2. Transmission Channels for QE and Effects on Interest Rates

Abstract

Recent literature on unconventional monetary policy has identified a number of potential channels through which QE can potentially have an impact on interest rates, which in turn may change the willingness of companies to invest and employ, individuals to spend, and banks to lend (see, for example, Joyce et al. 2011a, b; Krishnamurthy and Vissing-Jorgensen 2011). These changes are then expected to influence the level of inflation and economic growth.

Kjell Hausken, Mthuli Ncube

Chapter 3. The Central Bank Loss Function and Quantitative Easing as a Stackelberg Game

Abstract

The central bank loss function implies that the central bank’s benefit of QE is that of reputation enhancement of controlled inflation and strong economic growth. The loss function is quadratic capturing the deviation of the actual inflation and actual GDP from their socially desirable targets. The loss function at any time t is given by

$$ {L}_t=\frac{1}{2}\left[{\left({\pi}_t-{\pi}^{*}\right)}^2+\theta {\left({y}_t-{y}^{*}\right)}^2\right], $$

Kjell Hausken, Mthuli Ncube

Chapter 4. The Impact of Quantitative Easing on Interest Rates

Abstract

In this chapter, we empirically examine the impact of the recent quantitative easing (QE)-related announcements by the Federal Reserve, Bank of England, Bank of Japan, and European Central Bank on their respective government bond yields using an event study methodology. This methodology has been widely used in the recent studies on the similar topics (see, for example, Kapetanios et al. 2012; Christensen and Rudebusch 2012; Joyce et al. 2011a, b; Lam 2011; etc.). Following the literature, our event study focuses on the immediate changes in government bond yields over a fairly narrow interval around the QE-related announcements to capture the market’s direct reaction to the news released, and we then take the cumulative change over all the relevant events as a measure of the overall effects of QE-related announcements on interest rates. Given the fundamental differences in both the instruments used and the structures of the economies, interest rates are likely to respond to QE-related announcements in different ways across the economies.

Kjell Hausken, Mthuli Ncube

Chapter 5. Broader Economic Effects of Quantitative Easing

Abstract

Since the ultimate objective of quantitative easing is to stimulate economic growth and keep price stability, this chapter further assesses the wider effects of QE on a range of economic indicators, in particular output and inflation, in an attempt to address the research question of what would have happened to these major advanced economies if the unconventional monetary policies had not been undertaken by their respective central banks, i.e., the no-QE counterfactuals. Following the established methodology in the literature, we use large Bayesian vector autoregression (BVAR) models to estimate the impact of QE on the wider economy by assuming that the macroeconomic effects of QE work entirely through its impact on government bond yield spreads (see, for example, Kapetanios et al. 2012; Lenza et al. 2010; Baumeister and Benati 2010). More specifically, we produce no-QE counterfactual forecasts using large BVAR models by adjusting the spreads between government bond yields and the 3-month Treasury bill rate in accordance with our empirical findings presented in the previous chapter. The no-QE counterfactuals are then compared with their corresponding baseline forecasts which incorporate the effects of QE on government bond spreads. The difference between the two scenarios is considered as the broader economic impact of the unconventional monetary policies.

Kjell Hausken, Mthuli Ncube

Chapter 6. Conclusion

Abstract

In this brief, we analyze, empirically, the effects of quantitative easing on interest rates and the economy in the USA, Japan, the UK, and Europe. Using an event-study methodology, we find that the measures undertaken by the Federal Reserve and Bank of England, which focus primarily on bond purchases, are much more effective in lowering interest rates than those undertaken by the Bank of Japan and the European Central Bank, which have relied more heavily on lending to private financial institutions. Over the QE-related events, government bond yields in the USA and the UK decline cumulatively by over 100 basis points at medium and longer maturities, and more than 50 basis points at shorter maturities. In contrast, an average fall by only about 20 basis points is found for government bond yields in Japan, while mixed results are found for those in the euro area. The different impacts of QE on interest rates across economies, however, should be understood in light of their respective financial system structures.

Kjell Hausken, Mthuli Ncube

Backmatter

Titel: Quantitative Easing and Its Impact in the US, Japan, the UK and Europe
verfasst von: Kjell Hausken
Mthuli Ncube
Verlag: Springer New York
Electronic ISBN: 978-1-4614-9646-5
Print ISBN: 978-1-4614-9645-8
DOI: https://doi.org/10.1007/978-1-4614-9646-5