Journal Article

QE: a successful start may be running into diminishing returns

Charles A. E. Goodhart and Jonathan P. Ashworth

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 28, issue 4, pages 640-670
Published in print January 2012 | ISSN: 0266-903X
Published online December 2012 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grs034
QE: a successful start may be running into diminishing returns

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Existing studies may have underestimated the impact of QE1 on UK GDP because they did not take full account of the beneficial effect on credit risk spreads and on the exchange rate. However, all such effects were also influenced by the roughly simultaneous introduction of similar easing in the USA, which complicates the analysis. Another area where QE has been positive is in reducing public-sector borrowing costs. Where QE1 (and subsequent rounds) have disappointed is in their inability to stimulate a recovery in credit and monetary growth, amid an increased desire among banks to hold far more of their reserves at the central bank. Moreover, there is growing evidence of significant diminishing returns in QE2 as gilt rates have already fallen to historically low levels and the risk is that, if policy-makers fail to resuscitate the bank lending channel, further rounds of QE could potentially have negative returns

Keywords: exchange rates; interest rates; money multiplier; portfolio rebalancing; quantitative easing; risk spreads; E4; E5

Journal Article.  12905 words.  Illustrated.

Subjects: Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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