Purchases of government bonds have been a prominent tool that has helped central banks meet inflation objectives when short-term interest rates have been constrained by their effective lower bounds. But how does QE work? There are a range of channels through which QE can/might operate, though there remains uncertainty over the relative size and importance of these channels. This post presents new evidence from granular transaction data consistent with a portfolio rebalancing channel. Specifically, during the Bank’s latest QE programme (known as QE5) investors were found to have bought less new gilt issuance and bought more risky assets like corporate bonds.
Since QE began, banks have had a lot more liquidity to make payments. But some have argued (in a nutshell) that banks are reliant on this extra liquidity to make their CHAPS payments and it would be difficult to remove it from the system. Our analysis shows that banks don’t need a great deal of liquidity to make their payments simply because they recycle such a high proportion of them. In practical terms, banks do not rely on high reserves balances to make their CHAPS payments so unwinding QE shouldn’t have any impact on banks’ ability to do just that. We also briefly go over the potential reasons for this such as the CHAPS throughput rules, the Liquidity Savings Mechanism, and the tiered structure of CHAPS.
The financial crisis has thrown up a huge number of empirical challenges for academic and professional economists. The search is on for a framework with a rich enough variety of financial and real variables to examine both the financial shocks that caused the Great Recession and the unconventional policies, such as Quantitative Easing (QE), that were designed to combat it. In a new paper we show how using an older structural econometric modelling approach can be used to provide insights into these questions in ways other models currently cannot. So what are the advantages of going back to an older tradition of modelling? Continue reading “Modelling banking sector shocks and unconventional policy: new wine in old bottles?”→
When faced by a slowing economy and contracting credit what policy should be used? There is a body of evidence to suggest that QE is an effective means to boosting asset prices, aggregate demand and inflation, but it’s far less clear whether it improves the flow of credit to the economy. In theory, increases in deposit funding caused by such purchases might lead banks to increase lending. In this post we explore how this might occur. But we find no evidence that this happened in the UK. This may reflect the fact that QE worked instead through a so called ‘portfolio rebalancing channel’ and that the resulting churn in banks’ deposit funding stopped any such channel from operating. Continue reading “Did Quantitative Easing boost bank lending?”→