Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK

Abstract

This paper considers the impact of US and UK Quantitative Easing (QE) on their respectiveeconomies with a particular focus on the stock market, production and price levels. We conduct anempirical quantitative exercise based on a novel six-variable VAR model, which combines macroeconomic and forward-looking financial variables and uses a 'pure' measure of QE. The results suggest a positive response of equity prices, and a 'V' shaped reaction of volatility and the bid-ask spread to the monetary stimulus. Output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank's programmes. We attribute the variation to this difference in our modelling approach, which includes stock market variables, and we conclude that its presence is of critical importance in the assessment of unconventional monetary policy. Economically, we argue that the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than real projects.