Chapter 2: Impact of quantitative easing
32.This chapter assesses the overall effect of quantitative easing on financial conditions and wider economic effects such as GDP and inflation. The evidence that we set out in this chapter examines the rounds of quantitative easing that were conducted between 2009–12 and in 2016. It does not examine the most recent rounds of quantitative easing that were announced between March and November 2020, in response to the COVID-19 pandemic. These are examined in Chapter 3.
Effectiveness of quantitative easing
33.The impact of quantitative easing has been subject to growing academic and central bank research. However, there is a recognition across the literature that measuring the effectiveness of quantitative easing is difficult to do with precision. The use of quantitative easing at scale is still relatively new and there are long lags between its deployment and the ability to assess its precise effect. Furthermore, the counterfactual—what would the effect have been if quantitative easing had not been deployed—is difficult to establish.
34.To date, empirical literature has covered two main issues: the impact of quantitative easing on financial conditions, and its effect on macro-economic variables like GDP and inflation. The Bank of England said that, of the two, the fundamental objective of quantitative easing “is to provide monetary stimulus to help the Monetary Policy Committee meet its inflation target.”16 The Bank of England’s understanding is that quantitative easing helps it to meet its inflation target by lowering long-term borrowing costs, which it hopes will encourage spending on goods and services and put an upward pressure on prices.17
35.The Bank of England has said that the effectiveness of quantitative easing is largely state-contingent and depends on the prevailing economic and financial conditions. For instance, quantitative easing may be “particularly effective as a monetary policy tool when deployed at a time of market dysfunction.”18 While this is not the primary objective of quantitative easing, the Bank said that by restoring market functioning, quantitative easing supports financial stability when markets are in distress.19
36.Daniel Gros, Distinguished Fellow at the Centre for European Policy Studies, told us that there is evidence which shows that quantitative easing is “very important” in a crisis when markets are dysfunctional.20 However, he argued that the overall impact of quantitative easing on the real economy and inflation has been “vastly overestimated.”21
37.Several witnesses provided similar assessments. Professor Özlem Onaran, from the University of Greenwich, said that while quantitative easing has helped to stabilise financial markets, its effectiveness as a tool to address stagnant or low rates of investment and growth appears to be negligible.22 Frances Coppola, an author and economics commentator, said that quantitative easing can “be summarised as an effective tool for arresting a deflationary collapse, but an extremely weak economic stimulus with unfortunate distributional effects.”23 Fran Boait, Executive Director of Positive Money, told us that quantitative easing is reliant on “trickle-down economics” through both the wealth channel and the bank lending and portfolio rebalancing channel, neither of which are proven to stimulate spending and investment which results in economic growth.24
38.Professor Tim Congdon, Founder and Chairman of the Institute of International Monetary Research, told us that the use of quantitative easing in 2009 prevented a deflationary spiral from taking place. He said that without quantitative easing, “the quantity of money would have fallen very rapidly”.25 Adam Posen, President of the Peterson Institute for International Economics, said that quantitative easing “tends to work most powerfully when a financial panic is under way”, but its ability to stimulate spending and investment in stable economic conditions is like “pushing on a string.” He continued: “part of the reason that there is so much confusion and frustration about quantitative easing is that … it [can move] credit market spreads and liquidity conditions without … having the desired … or expected effects on inflation outlook and growth.”26
39.We heard that quantitative easing has, in some cases, resulted in significant increases in pension fund deficits and it has led to investment in high-risk assets as part of a ‘search for yield’. The Pensions and Lifetime Savings Association told us that, on balance, it believed quantitative easing had benefitted pension funds due to the support it had provided to the economy, which it said helped businesses which sponsor and contribute to pension schemes. However, it said that because quantitative easing had pushed up the price of gilts, it had “increased asset values for defined benefit schemes holding gilts but also reduced the expected yield.” The combination of low yields and low long-term interest rates used to discount future obligations resulted in liabilities being increased. For defined benefit schemes, we heard that quantitative easing had resulted in “significant increases in deficits” that have had to be filled through higher employer contributions or greater investment returns.27
40.Professor Philip Davis, Professor of Banking and Finance at Brunel University and a Fellow at the National Institute of Economic and Social Research (NIESR), said that one of the consequences of reducing the yield on government bonds through quantitative easing is a “countervailing risk that pension funds are seeking to invest in high-risk assets going forward to obtain [the] required rate of return in [the] context of low long rates and the shift to bonds.” There is “some evidence” of pension funds engaging in a “search for yield” through investment in leveraged alternative assets, structured products, private equity and derivatives.28
41.Aberdeen Standard Investments, an asset management company, thought it difficult to identify the effects of quantitative easing in isolation from other economic trends. It said that the effectiveness of quantitative easing on inflation and measures of economic growth appears in large part to depend on whether fiscal policy is concurrently expansive or contractionary. In contrast to the initial phases of quantitative easing, which were conducted in a contractionary fiscal environment, Aberdeen Standard Investments said that the 2020 rounds of quantitative easing “may be more powerful than previous rounds” because of an expansionary fiscal policy.29
42.Other witnesses made a similar point. Frances Coppola said that quantitative easing would have a greater impact on macroeconomic variables such as growth and GDP if it were implemented alongside a more significant package of fiscal policies that aimed to stimulate the economy.30
43.Nigel Wilson, Chief Executive Officer at Legal & General, said that quantitative easing is not the right policy tool for stimulating sustainable economic growth. He said that quantitative easing had boosted asset prices and stabilised financial markets successfully, but that it cannot be expected to create sustainable economic growth, for which an active fiscal policy was needed instead.31
44.Lord Turner of Ecchinswell, former Chairman of the Financial Services Authority and a former member of the Court of the Bank of England, characterised one of the effects of quantitative easing as “lubricating a fiscal expansion”. He told us quantitative easing is currently providing the impetus for the Government’s active fiscal policy, arguing that this is quantitative easing’s most effective transmission mechanism.32 Dr Will Bateman, Associate Professor at the Australian National University, made a similar point: “The main fiscal policy effect of [quantitative easing] is to maintain the UK Government’s access to debt finance in large volumes and low cost in the face of sustained budget deficits.” In so doing, quantitative easing provides “critical support during economic emergencies when fiscal receipts fall significantly behind public expenditure.”33
45.Lord Macpherson of Earl’s Court, former Permanent Secretary at HM Treasury, told us that the effectiveness of quantitative easing had diminished over time. When it was first deployed in 2009—after interest rates were cut from 4.5% in October 2008 to 0.5% in March 2009—it “had a real impact”. However, he argued that when long-term interest rates are close to the zero lower bound the Bank of England must “buy a great deal of debt to have any impact at all.”34
46.We heard that central banks take a more positive view of quantitative easing than independent analysts. Chris Giles told us that the Bank of England’s analysis of how quantitative easing works had been inconsistent—with stress put on different transmission mechanisms in different rounds. He said that despite its inconsistencies, the Bank of England “never has any doubt that it is working” although “it has often changed the way in which it says it is working.”35
47.Daniel Gros said that there is “a certain bias in the available evidence”, highlighting a recent paper for the National Bureau of Economic Research that set out how central bank research tended to show quantitative easing has a stronger impact on output and inflation than independent academic research.36 Pointing to the same research, Blonde Money, an independent macroeconomic research consultancy, said, “with central banks marking their own homework, the jury is still out on the success of quantitative easing.”37
48.Andrew Bailey, the Governor of the Bank of England, told us that quantitative easing is most effective “in a situation where there is impaired market liquidity.” He disagreed that its effect is diminished over time: “it is not surprising … that the effects of quantitative easing vary over time, but I would not subscribe to the view that there is some sort of linear progression of [quantitative easing] and it becomes either more or less effective.”38
49.Quantitative easing is particularly effective as a tool to stabilise financial markets. There is strong evidence that shows it is an effective monetary policy tool when it is deployed at times of crisis, when financial markets are dysfunctional or in distress.
50.While the evidence on quantitative easing’s economic impact is mixed, we note that central bank research tends to show quantitative easing in a more positive light than the academic literature. We conclude, on balance, that the evidence shows quantitative easing has had limited impact on growth and aggregate demand over the last decade. To stimulate economic growth and aggregate demand, quantitative easing is reliant on a series of transmission mechanisms that operate primarily in and through financial markets. There is limited evidence to suggest that these increase bank lending or investment, or boost consumer spending by wealthy asset holders.
‘Knowledge gaps’
51.We were told that the Bank of England produced several pieces of research between 2009 and 2013 that contributed significantly to early conclusions on the effectiveness of quantitative easing.39 However, when the Bank of England was not conducting quantitative easing between 2013 and 2016, research on it was limited. Melissa Davey, Director of the Bank of England’s Independent Evaluation Office, told us that the Bank should have “spent more time in investing in its understanding and thinking about its policy toolkit”.40
52.While the number of Bank of England publications assessing the impact of quantitative easing has increased in recent years,41 we were told that there are still significant “knowledge gaps” in the Bank of England’s understanding of quantitative easing. Melissa Davey told us that its most significant knowledge gaps were:
- which transmission mechanisms—portfolio rebalancing, market liquidity, signalling and wealth effects—are most effective;
- the effect of quantitative easing on growth and inflation; and
- how the prevailing economic and financial conditions in which quantitative easing is deployed is expected to affect its impact.42
53.Professor Daniela Gabor said that the Bank of England does not have a sufficient theoretical understanding of the effects of quantitative easing. In particular, she highlighted its lack of knowledge of the links and interactions between monetary and fiscal policy. She said, “We have had five rounds of quantitative easing and we have a central bank that does not quite clearly understand the transmission mechanism of monetary policy.”43
54.The Bank of England has acknowledged that the evidence on quantitative easing is still evolving.44
55.The Bank of England’s understanding of quantitative easing’s effects and its transmission mechanisms are far from complete more than a decade on from the policy’s introduction. Given that quantitative easing has increasingly become a conventional monetary policy tool, we recommend that the Bank of England prioritises research on:
- the effectiveness of quantitative easing’s transmission mechanisms into the real economy;
- the effect of quantitative easing on inflation and how it helps the Bank of England to meet its inflation target; and
- the impact that quantitative easing has had on economic growth and employment.
Distributional effects
56.The distributional effects of quantitative easing—meaning the redistributive impact of the policy—are difficult to measure separately from other economic events and so should be considered alongside its effect on employment, incomes and growth. In other words, the extent to which quantitative easing has a positive effect on employment and incomes should be taken into consideration when assessing whether it has led to any negative distributional outcomes.
57.One of the deliberate consequences of quantitative easing is to raise asset prices. There is a body of evidence that perceives this to have increased wealth inequalities.45 However, when we asked the Governor whether quantitative easing had increased wealth inequality in the UK, he said that he “would not agree.”46
58.The Bank of England said that the overall effect of quantitative easing on standard measures of income and wealth inequality had been relatively small.47 The Bank of England said that if it had not deployed quantitative easing in response to a series of economic shocks, the impact on income and unemployment would have been significantly worse. It said that the positive support that quantitative easing provided for jobs and wages in the economy outweighed any increase in asset prices and wealth inequality.48 Dr Ben Broadbent, Deputy Governor for Monetary Policy at the Bank of England, told us that by supporting the economy, quantitative easing reduced income inequality “at the margin” by mitigating the loss of employment in groups who are less well paid.49
59.Aberdeen Standard Investments made a similar point. It said that by easing financial conditions quantitative easing “tends to put upward pressure on growth, wage growth and inflation and downward pressure on unemployment … given that we know that downturns especially negatively affect the poor in terms of wage growth and employment, this impact is likely to be especially beneficial in terms of reducing inequality.”50
60.The Bank of England said that it is important to consider a broader range of indicators when assessing the impact of quantitative easing on inequality. Drawing on recent research,51 it said that looser monetary policy and quantitative easing has resulted in “substantial welfare benefits” which had helped to “mitigate the fall in overall well-being after the financial crisis.”52 Through this lens, the Bank said that while older households had benefited from the effect of quantitative easing on asset prices (by increasing the value of assets), younger households have, on average, “benefited the most from the support that [quantitative easing], and monetary policy, has given to incomes and employment.” Moreover, it said that younger households had also benefited from “an erosion in the real value of debt since they are more likely to be borrowers than savers.”53
61.However, Melissa Davey, Director of the Independent Evaluation Office of the Bank of England, told us, “The Bank’s engagement in the debate [on quantitative easing exacerbating inequality] was often described… as quite defensive”.54
62.Nigel Wilson said that, by inflating asset prices without a corresponding increase in productivity or real wages, quantitative easing had caused wealthy households to benefit more than less wealthy households: “Rich people in rich countries and poor countries have done really well out of quantitative easing, but poor people relatively have not done well in any of the economies.”55 Similarly, Frances Coppola said that the use of quantitative easing over a sustained period had increased intergenerational inequalities. She said that by raising asset prices intentionally, quantitative easing benefits older generations, who are disproportionately more likely to hold assets.56
63.Professor Özlem Onaran told us that the positive effects of quantitative easing are “higher for the top of the distribution and lower for the bottom of the wealth and income distribution.”57 James Smith, Research Director at the Resolution Foundation, referred to research by the Resolution Foundation which showed that “40% of the impact [of quantitative easing] on asset prices accrued to … the top 10% of people” in the distribution of wealth. Fran Boait also told us that “the richest 10% of households benefited by £350,000 during the first round of quantitative easing, which was more than 100 times the benefit for the poorest.”58
64.Chris Giles, while accepting the Bank of England’s position that quantitative easing had mitigated inequalities of income by supporting employment, said that the increase in asset prices since the financial crisis made the Bank of England’s position on wealth and intergenerational inequalities “much less convincing”.59 Charles Goodhart, Emeritus Professor of Banking and Finance at the London School of Economics, made a similar point. He said that the Bank of England was right to say that quantitative easing does not increase income inequality, but the effect of raising asset prices had resulted in an increase in wealth inequality.60
65.Other witnesses told us that the more persistent than expected use of quantitative easing over the last decade had led to excessive and potentially destabilising risk-taking in markets. Dr Mohamed El-Erian, President of Queens’ College Cambridge and Chief Economic Adviser at Allianz, told us that markets are in a bubble in which “financial assets are totally decoupled from [economic] fundamentals.”61 He said that the decoupling of assets from the real economy was a rational process because consistent central bank intervention through quantitative easing means that financial markets can take excessive risks in the knowledge that central banks will provide support if financial stability is threatened. He told us that the major risk is that this develops into an unhealthy co-dependency between central banks and markets.62 He added: “Not only do markets expect central banks to come in and repress any volatility, regardless of the source of that volatility, but they require it. They feel entitled to central bank support.”63
66.Lee Buchheit, Visiting Professorial Fellow at Queen Mary University of London, also told us that the global scale of quantitative easing could potentially compromise financial stability. The extra liquidity in the global system from quantitative easing “means that you have an investor community flush with liquidity that must be re-deployed in some fashion … This is the kindling for the proverbial search for yield.” One of the consequences is that “the normal risk aversion of private sector lenders has not been eclipsed, but it has been anaesthetised by the fact that they are stuffed with liquidity that they must re-deploy and, therefore, they have implicitly revisited their normal risk aversion.”64
67.Quantitative easing is an imperfect policy tool. Its use in 2009, in conjunction with expansionary fiscal policy, prevented a recurrence of the Great Depression and in so doing mitigated the growth of inequalities that evidence shows are exacerbated and deepened during economic downturns.
68.However, the mechanisms through which quantitative easing effectively stabilised the financial system following the global financial crisis have benefited wealthy asset holders disproportionately by artificially inflating asset prices. On balance, we conclude that the evidence shows that quantitative easing has exacerbated wealth inequalities.
69.The Bank has not adequately engaged with debate about the trade-offs created by sustained quantitative easing. We heard that it has been “defensive” about the extent to which quantitative easing has exacerbated inequalities. The Bank should publish an accessible overview of the distributional effects of quantitative easing which includes a clear outline of the range of views as well as the Bank’s view.
70.The extent to which, and how, quantitative easing interacts with fiscal policy is still poorly understood. What is clear is that quantitative easing has distributional outcomes that exacerbate wealth inequalities that can be mitigated only through fiscal policy. We do not believe this is a reason for the Bank of England not to use quantitative easing as a monetary policy tool. Rather, more effective countervailing policies can be introduced by Government if these negative distributional effects are better understood. We therefore invite HM Treasury to reply to any research that the Bank produces on the distributional effects of quantitative easing.
17 Written evidence from the Bank of England (QEI0015). Research by Bank staff studying the initial £200 billion of quantitative easing suggests that it may have resulted in GDP increasing by around 1.5–2%, whilst it estimates that inflation rose by around 0.75–1.5% as a result. See Bank of England, The United Kingdom’s quantitative easing policy: design, operation and impact (2011) pp 200–212: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2011/the-uks-quantitative-easing-policy-design-operation-and-impact.pdf [accessed 5 July 2021]. Similarly, research by Bank staff in 2016 found that quantitative easing programmes in the US and UK appear to have had a positive and significant impact on economic activity and inflation. See Bank of England, Staff Working Paper No 624, QE: the story so far (October 2016): https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2016/qe-the-story-so-far.pdf [accessed 5 July 2021]
19 Ibid.
36 Q 104 (Daniel Gros). See National Bureau of Economic Research, Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (April 2021): https://www.nber.org/system/files/working_papers/w27849/w27849.pdf [accessed 5 July 2021]
39 See for instance Michael Joyce, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong ‘The Financial Market Impact of Quantitative Easing in the United Kingdom’, International Journal of Central Banking, vol. 7 (2011): https://www.ijcb.org/journal/ijcb11q3a5.pdf and Bank of England, The United Kingdom’s quantitative easing policy: design, operation and impact (2011) pp 200–12: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2011/the-uks-quantitative-easing-policy-design-operation-and-impact.pdf [accessed 5 July 2021]
41 See for instance Bank of England, Staff Working Paper No. 720, The distributional impact of monetary policy easing in the UK between 2008 and 2014 (March 2020): https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/the-distributional-impact-of-monetary-policy-easing-in-the-uk-between-2008-and-2014.pdf [accessed 5 July 2021]. See also Bank of England, The central bank balance sheet as a policy tool: past, present and future, Paper prepared for Jackson Hole Economic Policy Symposium, 27–28 August 2020 (2020): https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/the-central-bank-balance-sheet-as-a-policy-tool-past-present-and-future.pdf [accessed 5 July 2021] and Dave Ramsden, speech on QE as an economic policy tool – what does it do and how should we use it?, 17 February 2021: https://www.bankofengland.co.uk/-/media/boe/files/speech/2021/february/qe-as-an-economic-policy-tool-what-does-it-do-and-how-should-we-use-it-speech-by-dave-ramsden.pdf [accessed 5 July 2021]
42 Q 41 (Melissa Davey). The 2021 Independent Evaluation Office report on quantitative easing identified several other knowledge gaps in the Bank’s understanding, including the interlinkages between quantitative easing and financial stability, and consideration of potential monetary–fiscal interlinkages. It identified several long-term issues that it said the Bank lacked clarity on, such as: the potential limits of quantitative easing, how those limits might interact with very low long-term interest rates and the implications of unwinding quantitative easing. See Bank of England, ‘IEO evaluation of the Bank of England’s approach to quantitative easing’: https://www.bankofengland.co.uk/independent-evaluation-office/ieo-report-january-2021/ieo-evaluation-of-the-bank-of-englands-approach-to-quantitative-easing [accessed 5 July 2021]
45 For instance BIS, Wealth inequality and monetary policy (March 2016): https://www.bis.org/publ/qtrpdf/r_qt1603f.pdf [accessed 5 July 2021]. See also Haroon Mumtaz and Angeliki Theophilopoulou, ‘The impact of monetary policy on inequality in the UK: an empirical analysis’, European Economic Review, vol. 98, (2017), pp 410–423: available at https://www.sciencedirect.com/science/article/abs/pii/S0014292117301332 and Resolution Foundation, Quantitative (displ)easing? Does QE work and how should it be used next time? (September 2019): https://www.resolutionfoundation.org/app/uploads/2019/09/Quantitative-displeasing-FINAL-VERSION.pdf [accessed 5 July 2021]
47 A 2018 paper by Bank of England staff found that the overall effect of monetary policy on standard measures of income and wealth inequality has been small. The paper estimates that households close to retirement age gained the most from quantitative easing, but that the support it provided to incomes disproportionately benefited younger people and households. See Bank of England, Staff Working Paper No. 720, The distributional impact of monetary policy easing in the UK between 2008 and 2014
51 See Bank of England, Staff Working Paper No. 720, The distributional impact of monetary policy easing in the UK between 2008 and 2014
53 Ibid.