Broader Economic Effects of Quantitative Easing

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.