A worker pushes a wheelbarrow of debris outside the Bank of England in London on June 17, 2020. - ... [+]
Quantitative Easing (QE) has been a focus of American and British monetary policy since 2008. It largely continues to this day, with some modifications. Other central banks from Japan to Switzerland are following somewhat similar policies. However, recent research suggests that the main result of the policy is to push up stock prices without necessarily impacting the actual economy. If true, this is a problem since central bankers may have inadvertently triggered an asset price bubble without doing much to positively impact the metrics that they are typically targeting such as unemployment, growth and inflation.
The Research
In their paper titled, Did Quantitative Easing only inflate stock prices? Researchers from Henley Business School and the University of Reading explored the impacts of QE policies from central banks. They do this through building an economic model to capture the U.K. and U.S. experience with QE over recent years.
Of course, determining linkages from monetary policies is complex, but there is now at least a decade of data across countries which makes determining the effects a little easier. They find that though QE may have improved employment, it hasn’t done much else for the real economy. Also, in addition to pushing up stock prices QE may also have reduced volatility in the stock market and improved liquidity.
A Bubble?
If QE has created a stock-price bubble it’s a very long-lasting one. For example this piece from the UK’s Guardian newspaper outlines the arguments. Namely, that valuations are at excessive levels and growth is mediocre at best. However, the piece was written in 2014 and even despite extreme pandemic-related volatility in the interim, the bubble hasn’t burst yet almost 7 years later. Though equally, critics could point out that though any bubble hasn’t yet ended, nor has QE.
Nonetheless, the researchers argue that more could be done to make sure that QE targets the real economy. If the central banks are going to massively increase their balance sheets then it is perhaps more useful if the resulting spending goes into projects that help the real economy, rather than just boost stock prices. Of course, if rising stock prices had coincided with gains for the real economy, that would be more beneficial, but it is not the conclusions the researchers come to.
Economic models such as this are challenging, because correlation is not the same as causation and though we now have more of a historical perspective on the impacts of QE, the fact that QE hasn’t really ended means we perhaps still don’t know the full story. If and when QE should unwind, we may be able to better form a view as to its full impact. For now, that seems unlikely and it does appear that though the economic impact may be mixed, QE is perhaps one contributor to the strong run that we’ve seen in markets over recent years.
