Financial effects of QE and conventional monetary policy compared

Abstract

We explore the size of the financial effects of QE relative to those of conventional monetary policy for the Euro Area, UK and US. Following previous work for conventional monetary policy we examine the effects on private credit imbalances, financial market risk and asset valuation. We adopt an agnostic Bayesian VAR approach, identifying QE and conventional monetary policy shocks with four different identification schemes and two different measures of unconventional monetary policy. We compare the size of each financial effect by the amount of inflation generated by each policy, as all three of these central banks were targeting inflation during this time. The relative size of these effects is highly relevant to the current debate about the financial stability effects of monetary policy and how to optimally coordinate these instruments during a tightening cycle. While both conventional monetary policy and QE generate some financial effects, there is no statistical evidence that the effect of QE on these variables is consistently larger than the effect of conventional monetary policy.