The Fall of Rome: Am I too Much of a Malthusian-Ricardian to Understand It Properly?

My read of the evidence is somewhat different here: my view is that forward guidance did something, but quantitative easing did very, very little. And the idea that quantitative easing made forward guidance more credible? I do not see that. Yes, quantitative easing was a big deal for the financial professionals Who otherwise would have held the treasury bonds that the Federal Reserve bought. But I do not see any channels through which their attempt to compensate add large affects and the real economy of productions and demand: Ken Kuttner: Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond: “A preponderance of evidence nonetheless suggests that forward guidance and quantitative easing succeeded in lowering long-term interest rates. Studies using micro data have documented tangible effects of quantitative easing on firms and financial intermediaries. Macro models suggest that the interest rate reductions are likely to have had a meaningful impact. The adverse side effects appear to have been mild, and are dwarfed by the costs of the more protracted recession in the United States that likely would have occurred in the absence of the unconventional policies. The benefits of unconventional policy therefore probably outweighed the costs...

...Some questions are not entirely settled. First, the persistence of the effects on interest rates remains unclear. Second, disentangling the effects of quantitative easing from those of forward guidance is difficult. Third, the effects of these policies may have been in part a function of turbulent financial conditions, or may have diminished over time as the novelty wore off. Given the uncertainties and weaknesses of the evidence, what have the past nine years taught us about the appropriate design of unconventional policies, should they be needed in the future? Six tentative lessons can be drawn from the US experience.

First, unconventional monetary policy should be conducted in a rule-like manner to the extent possible. In practice, this means clearly relating asset purchases and/or forward guidance to the Fed’s objectives and forecasts. A policy articulated on a flow basis conditioned on ongoing economic developments, like QE3, is likely to be more amenable to expression in terms of a rule than one involving large, infrequent discrete adjustments to the balance sheet targets.

Second, if the research is correct in indicating that quantitative easing functions primarily through the removal of duration risk from the market, policy objectives could be accomplished either by reallocating a central bank portfolio of a fixed size or by expanding the balance sheet. Given that the purpose of quantitative easing was not to increase bank reserves, it would make sense to use portfolio reallocation as the first step in implementing quantitative easing. However, given that there have been no discernible ill effects from expanding the balance sheet (independent of any that may have resulted from very low interest rates), the unsterilized purchase of long-term bonds is a perfectly viable policy option, too.

Third, forward guidance and quantitative easing are not substitutes, as they operate through different transmission mechanisms: expectations of future interest rates for the former, the portfolio balance effect (primarily) for the latter. Thus, the two policies could be implemented independently. There could also be complementarities between them...


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