Quantitative Easing Research Articles

The Impact of Status Quo Bias on Monetary Policy Decision-Making: A Case Study of the 2008 Financial Crisis

This research examines the role of status quo bias in shaping monetary policy decision-making during the 2008 financial crisis, focusing on the responses of the Federal Reserve and the European Central Bank (ECB). Status quo bias, a cognitive bias that leads individuals and institutions to resist change, often results in delayed decisions and sub-optimal outcomes. This study employs a comparative case study methodology, analyzing the timing and nature of central bank interventions, such as interest rate cuts and quantitative easing during the crisis. By systematically reviewing policy actions and utilizing qualitative content analysis, the research identifies how status quo bias contributed to delayed responses and inadequate adjustments. The findings indicate that while the Federal Reserve, despite initial hesitation, quickly implemented unconventional measures that helped stabilize the U.S. economy, the ECB's adherence to traditional frameworks led to critical delays, resulting in a slower recovery in the Eurozone. These insights underscore the significant influence of cognitive biases on monetary policy, with implications for future crisis management strategies. Addressing the effects of status quo bias could lead to more agile and adaptive central banking policies, ultimately enhancing economic resilience during times of crisis.

The Impact of the Fed's Monetary Policy Adjustment on China's Macro-economy

In the context of highly integrated global economies, the Federal Reserve (Fed), as the central bank of the United States, exerts widespread and profound influence through its monetary policy adjustments. This paper systematically analyzes the mechanisms and extent of the Fed's monetary policy adjustments on China's macroeconomy. First, this paper explored the main tools and recent adjustment paths of the Fed's monetary policy, including interest rate policies, quantitative easing (QE), and balance sheet reduction. Second, this paper analyzed how these policy adjustments are transmitted to the Chinese economy via international capital flows, exchange rate fluctuations, and changes in trade conditions. The study finds that Fed rate hikes can lead to a stronger U.S. dollar, prompting capital to flow back to the United States and exerting depreciation pressure on the Chinese yuan. This, in turn, affects China's export competitiveness and inflation levels. Additionally, increased volatility in global financial markets may pose challenges to China's financial stability. Finally, this paper propose policy recommendations for China to effectively respond to the Fed's monetary policy adjustments, including strengthening macro-prudential management, improving the exchange rate mechanism, and deepening financial market reforms.

The effect of COVID-19 and U.S. monetary policy on Bitcoin and stock market volatility: an application of DCC-GARCH model

During the COVID-19 pandemic and subsequent periods of US monetary policy normalization after quantitative easing during COVID-19, global financial markets have encountered elevated levels of volatility and risk. In response, investors have increasingly sought out unconventional financial assets, such as Bitcoin, to mitigate exposure and enhance portfolio diversification. This study utilizes a Dynamic Conditional Correlation (DCC) Multivariate GARCH model, specifically employing the GARCH (1,1) specification, to analyze the relationship between stock markets index of major countries and cryptocurrency, with a particular focus on Bitcoin. The results indicate statistically significant correlations between Bitcoin and stock market returns in several countries during the COVID-19 period. Volatility appears to be influenced by historical stock market performance during both the pandemic and the subsequent normalization of monetary policy. Furthermore, the DCC-GARCH models reveal low significant coefficients for ASEAN stock market indices before and during the COVID-19 pandemic, indicating that these markets may have displaced Bitcoin as a hedge asset. In contrast, stock market indices in America and Europe consistently show statistical significance across all periods, suggesting that Bitcoin’s role as a hedge in these regions is limited. In contrast, gold clearly demonstrated safe haven properties before the COVID-19 pandemic which a characteristic had not been observed for Bitcoin. However, gold has emerged as a safe haven for only ASEAN stock markets since the U.S. initial 0.25% interest rate hike.

Money Matters: Broad Divisia Money and the Recovery of the US Nominal GDP From the COVID‐19 Recession

ABSTRACTThe rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because of past instability in the demand for simple‐sum monetary aggregates. We find that the demand for more theoretically based Divisia aggregates can be modeled and that these aggregates provide useful information about nominal GDP. Unlike M2 and Divisia‐M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are stable and can be empirically modeled through the Covid‐19 pandemic. In the long run, these velocities depend on regulation and mutual fund costs that affect the substitutability of money for other financial assets. In the short run, we control for swings in mortgage activity and use vaccination rates and the stringency of government pandemic restrictions to control for the unusual pandemic effects. The velocity of broad Divisia money declines during crises like the Great and COVID Recessions but later rebounds. In these recessions, monetary policy lowered short‐term interest rates to zero and engaged in quantitative easing of about $4 trillion. Nevertheless, broad money growth was more robust in the COVID Recession, reflecting a less impaired banking system that promoted rather than hindered deposit creation. Our framework implies that nominal GDP growth and inflation rebounded more quickly from the COVID Recession versus the Great Recession. Our different scenarios for future Divisia money growth and the unwinding of the pandemic have different implications for medium‐term nominal GDP growth and inflationary pressures.

Quantitative Easing in Japan: A Longitudinal Analysis of Monetary Policy Effects and Challenges

This study presents a comprehensive analysis of the effects and challenges of quantitative easing as a monetary policy tool in Japan. Over a period of more than two decades, Japan has implemented quantitative easing to stimulate its economy, resulting in a unique economic landscape characterized by both short-term benefits and long-term uncertainties. By examining historical developments, recent economic trends, and potential risks, this research sheds light on the complex interplay between monetary policy and economic outcomes in Japan. This academic study will provide a comprehensive analysis of the effects and challenges of quantitative easing in Japan, focusing on both short-term benefits and long-term consequences. It will also examine recent economic trends and potential risks to the Japanese economy, offering insights and recommendations for policymakers while acknowledging the uncertainties surrounding the long-term effects of this monetary policy.

Macroprudential Regulation, Quantitative Easing, and Bank Lending

Abstract We show that widely used macroprudential regulations that rely on historical cost accounting (HCA) to insulate banks’ balance sheets from financial market volatility significantly affect the transmission of monetary policy onto bank lending. Using detailed supervisory data from Italian banks, we find that HCA mutes the transmission of quantitative easing and other monetary policies that affect the long end of the yield curve, weakening the effectiveness of interventions aimed at reducing firm credit constraints. We suggest alternative policies that have the benefits of HCA but allow monetary policy to pass through. (JEL E52, G21, M48)

Quantitative Easings Relationship with Unemployment: A Linear Regression Study

In recent years, with the development of the economy and society, quantitative easing (QE) has received increasing attention from scholars. The international community is gradually realizing the importance of QE. As a monetary tool, the impact of QE on social unemployment is receiving increasing attention. The author of this paper will investigate the relationships between QE and unemployment in the UK through the application of a Linear Regression model. The analysis will focus solely on the period from 2008 to 2024 to encompass the two big economic challenges the UK experienced and the changes that Quantitative Easing brought since it was first embarked as a monetary tool by the Bank of England. This study aims to provide insights into the effects of Quantitative Easing on Unemployment that could be further used by both policymakers to evaluate the policy and future research. This study has practical significance for fully understanding the importance of QE in society.

Exploring the Implementation of Quantitative Easing (QE) as an Expansionary Monetary Policy Across Nations and Regions: Implications for the Global Economy

Quantitative easing (QE) represents an unconventional, yet potent monetary policy lever employed by central banks. Through the strategic acquisition of government bonds and diverse financial assets, these banks effectively pump liquidity into the economic system. The objective is twofold: to deliberately drive down interest rates, thereby reducing the cost of borrowing and encouraging investment, and ultimately to stimulate economic growth and revitalize economic activity. This approach, though unconventional, has proven to be a vital tool in the central banks' arsenal for addressing economic downturns and fostering economic recovery. This paper explores the global ramifications of QE by analyzing its implementation in various countries and regions, with a focus on the resulting economic outcomes and the interconnected impacts on the global economy. Through a series of case studies, the research delves into how QE influences international capital flows, exchange rate volatility, global trade patterns, and the dynamics of financial markets. Additionally, the paper provides a critical evaluation of QE's effectiveness in achieving its intended economic objectives, while also highlighting potential risks such as asset bubbles, inflationary pressures, and increased debt levels. By examining both short-term benefits and long-term implications, this study offers insights into optimizing the deployment of QE policies to enhance their effectiveness and mitigate adverse effects. The research underscores the necessity for careful consideration and management of QE's broader economic impacts, ensuring that such policies support sustainable global economic stability.

Economic impacts of federal reserve policies on taxation and corporate finance

Federal Reserve policies play a pivotal role in shaping the U.S. economy, influencing not only macroeconomic stability but also the financial strategies and tax implications for corporations. Broadly, the Federal Reserve's use of monetary tools—such as interest rate adjustments, Quantitative Easing (QE), and inflation targeting—affects the economic environment within which businesses operate, impacting costs of capital, investment incentives, and overall corporate behaviour. Through mechanisms like lowering interest rates, the Federal Reserve reduces borrowing costs, which encourages companies to adjust their capital structures and debt levels, with significant implications for tax planning due to interest deductibility. QE, on the other hand, drives asset prices higher, promoting increased investment activity, stock buybacks, and changes in dividend policies that indirectly influence corporate taxation. This article examines the nuanced relationships between Federal Reserve decisions and corporate finance, analysing how shifts in policy impact tax revenue and how governments adapt tax policies to manage economic conditions such as inflation. By presenting case studies from the 2008 financial crisis and the COVID-19 pandemic, this analysis illustrates the practical effects of the Federal Reserve's actions on corporate financial decisions and the broader tax landscape. The article concludes by addressing the future of Federal Reserve policies in light of technological advances in finance and the adaptive strategies that corporate and regulatory bodies may adopt to navigate an increasingly dynamic economic environment.

Unconventional monetary and fiscal policy

We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE) and tax-financed fiscal transfers or government spending have similar effects on the aggregate economy. Compared with these three policies, conventional monetary policy is more inflationary. QE and transfers have redistribution consequences, whereas others do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.

Multiple Structural Breaks in Interactive Effects Panel Data Models

ABSTRACTThis paper develops new econometric methods for multiple structural break detection in panel data models with interactive fixed effects. The new methods include tests for the presence of structural breaks, estimators for the number of breaks and their location, and a method for constructing asymptotically valid break date confidence intervals. The new methodology is applied to a large panel of US banks for a period characterized by massive quantitative easing programs aimed at lessening the impact of the global financial crisis and the COVID‐19 pandemic. The question we ask is as follows: Have these programs been successful in spurring bank lending in the US economy? The short answer turns out to be: “No”.

Anatomy of wage rigidity in China: Lessons from the global financial crisis for post-pandemic recovery

This study examines the extent and cause of Chinese firms’ labour cost adjustment during the 2008 global financial crisis (GFC). First, we confirm that some typical features of downward nominal wage rigidity during the recession period coincide with the implementation of the Labour Contract Law, covering wages and social security payments. Second, we find that firms with higher shares of casual workers could lower their labour cost more effectively. The overall results demonstrate that the Quantitative Easing programme was necessary for counteracting the economic downturn during the GFC. Therefore, the length of this on-going crisis would be affected by wage rigidity in the economy. This study has implications for addressing the economic downturn in China following the COVID-19 pandemic, which is characterised by a high level of unemployment.

Impact of Natural Disasters on House Prices: A Global Analysis and Policy Implications

This study addresses the limited research on how natural disasters affect house prices by analyzing data from 117 countries between 2000 and 2018, using a panel regression approach to assess these impacts. The results reveal that natural disasters tend to decrease house prices, a finding that holds strong across multiple robustness checks. Specifically, geological disasters are found to have the most significant negative impact on property values. The study also distinguishes between the effects of small and large disasters, with both showing a clear downward effect on house prices. These insights carry important implications for policymakers and investors, as lower house prices in disaster-prone areas may indicate reduced consumption and investment due to the wealth effect, potentially leading to wider economic downturns. To support these regions, economic policymakers might consider measures such as low-tax policies or quantitative easing. The findings also highlight the urgent need for governments to address climate change impacts on the housing market by adopting sustainable technologies and renewable energy sources. Keywords Natural Disasters, House Pricing, Climate Change, Statistical model

Special section introduction: epistemic politics in international and comparative political economy

ABSTRACT Economic orthodoxy has faced multiple challenges over recent years, ranging from the global financial crisis and economic populism to the Covid-19 pandemic and the spectre of stagflation. This has generated significant policy innovations, like quantitative easing and the furlough schemes, while heterodox economic ideas (briefly) gained notoriety. Yet these shifts have frequently been grafted onto pre-existing institutional and discursive templates, anchored by the assumption that they represent a temporary deviation from ‘normal’ equilibrium conditions. To make sense of these dynamics of crisis, change and continuity, this special section showcases an ‘epistemic politics’ approach that foregrounds the political life of economic knowledge. It is framed around three questions. What has been the role of economic knowledge and expertise in shaping policy and regulation over the past decade? To what extent have dominant economic ideas, theories and models been impacted by political conflicts and emergent issues? How have policy makers navigated economic crises and uncertainty through cognitive and discursive practices? This introductory paper sets out the ambition for the special section by defining our understanding of epistemic politics, before detailing the threefold contribution it makes to wider scholarship in IPE and CPE. It concludes with an overview of the five papers.

MONETARY INSTRUMENTS IN ADDRESSING ECONOMIC CRISES: EFFECTIVENESS AND CHALLENGES

This article aims to investigate the anti-crisis reforms of the monetary policy of the Federal Reserve System (FRS) of the United States during the global financial crisis, the pandemic period, and the worsening of the military conflict in Ukraine. The study showed a significant decline in inflation due to the reduced demand for goods and services in the first two crises. Under these conditions, the Fed needed unprecedented measures to soften its policy. Repo rates fell to their lowest level during the 2008 crisis but rose during the pandemic, indicating a significant demand for these instruments to ensure stability. Since the 2008 crisis and pandemic, the easing policy has led to an increase in Fed assets. This has significant implications for the ability of monetary policy to respond to today's challenges and has led to the need for very careful control of assets. But in 2022, the Fed had to take measures to curb inflationary trends, in particular raising the discount rate.The regression analysis carried out in the article demonstrates a significant impact of monetary instruments on the consumer price index, which indicates the effectiveness of those methods used by the Fed. The article analyzes the use of traditional and non-traditional monetary policy tools of the Fed in different economic conditions and the possible risks and negative consequences of the use of non-traditional tools, such as quantitative easing and very low interest rates. Although these techniques can support the economy in a crisis, their risks need to be taken into account. The findings contribute to the knowledge of monetary policy as a management tool and provide stakeholders with valuable insights for future strategizing.

Quantitative Easing and Direct Lending in Response to the COVID‐19 Crisis

AbstractThis paper develops a dynamic general equilibrium model to study quantitative easing (QE) and direct lending to firms. QE works through three channels: expanding bank reserves raises liquidity and lowers the liquidity premium, purchasing assets withdraws risk and lowers the volatility risk premium, and the resulting economic stimulus lowers the credit risk premium. When bank reserves are higher, the liquidity premium channel is weaker, and QE is less expansionary. Direct lending is more expansionary than QE because it substitutes bank lending and mitigates the credit risk frictions associated with bank lending, while QE stimulates bank lending and worsens the frictions.

Conventional vs. unconventional monetary policy under credit regulation

Abstract We provide empirical evidence that the impact of quantitative easing (QE) programs on investment is weaker for countries with high-credit market regulations. We then extend a simple DSGE model with segmented financial markets to include credit regulation and examine its impact on the transmission of conventional and unconventional monetary policies. In our model, the government requires banks to hold a fraction of their assets in government debt. We show that the presence of such regulation can invert monetary transmission under QE policy: An expansionary QE program raises term premiums on corporate bonds and causes a contraction instead of an expansion in the economy. Such a perversion is absent under conventional policy. Further, in contrast to Carlstrom et al. (2017), we show that a simple Taylor rule welfare dominates a term premium peg under financial shocks, while the peg does better in the case of non-financial shocks.

Solving the problem of abundance: venture capital and the making of asset-driven inequalities

The 2010s were an era of abundant capital for investors but limited opportunities to put it to profitable use. This paper traces the origins of dealing with the ‘problem’ of having to convert large accumulations of cash into appreciating assets. It puts venture capitalists in the US at the center of this history. Charting venture capital’s 1950s emergence, 1960s formalization, and 1970s institutionalization, I show how early venture capital investors built a financial infrastructure that safeguarded the appreciation of their assets. Venture capitalists’ influence increased as institutional investors (as funders) and startup employees (as investees) became enrolled in this infrastructure and oriented their actions toward its imperatives. I argue that in their handling of abundance, venture capitalists constructed and deepened asset-driven inequalities. Empirically, the paper makes a contribution by demonstrating that vast accumulations of (personal) wealth played a decisive role in this process and highlights the importance of stark inequality well before the neoliberal turn or quantitative easing. Conceptually, I show that venture capitalists’ solution to a personal problem became useful at a much larger scale. The paper argues that we should read this influence as conditioned on elite surplus and access to a financial infrastructure.

Dynamic Spillovers from US (Un)Conventional Monetary Policy to African Equity Markets: A Time-Varying Parameter Frequency Connectedness and Wavelet Coherence Analysis

Since the implementation of unconventional monetary policies (UMPs) by the US in response to the global financial crisis (GFC) and the COVID-19 pandemic, there have been increasing concerns that these forward guidance and quantitative easing programmes have had spillover effects on global equity markets. We specifically question whether the implementation of these UMPs have had spillovers to African equities, which have been previously speculated to be decoupled from global markets and shocks. Time-varying-parameter (TVP) frequency connectedness and wavelet coherency methods were used to examine the dynamic time-frequency spillovers between daily time series of the US shadow short rate and African equities returns/volatility between 1 January 2007 and 31 March 2023. On one hand, the TVP frequency connectedness analysis reveals robust long-run spillovers from US monetary policy to African equity markets during specific periods: 2009, 2013, 2020, and 2021. These coincide with instances when the Federal Reserve announced their transition from conventional to unconventional monetary practices and vice versa. On the other hand, the wavelet analysis provides insights into the ‘sign’ of the spillovers, indicating mixed phase dynamics during UMPs responding to the GFC. In contrast, anti-phase or negative co-movements characterize UMPs implemented during the COVID-19 pandemic, implying that these policies increased both returns and volatilities to African equities. Altogether, we conclude that US UMP has increasing deteriorated market efficiency and amplified portfolio risk in African equities whilst during ‘normalization’ periods US monetary policy has little transmission effect.

The Power Bloc of Finance Capital and the Debacle of the Central Bank: Toward the Final Crisis

ABSTRACT One of the most fundamental changes taking place in the present phase of capital development is the emergence of a power bloc of finance capital. The concentration and centralization of capital in the context of digital technology and globalization has brought about a unification of the circuits of the different fractions of capital (productive, financial, and commercial), giving birth to finance capital. Thanks to neoliberal doctrine, finance capital has achieved a wide field of maneuver, and converted into a power bloc, it follows a monopoly factional strategy with a variety of social impacts. Central bankers, under a false guise of impartiality, have become partners of this power bloc, acting as its lenders of last resort and validating its preferences in market strategy and credit management. This article analyzes and discusses three topics: a) the role played by finance capital in the accumulation of capital, in particular, its conversion into a power bloc and the economic and socio-political consequences of that change; b) the economic implications of a bailout of finance capital by the lender of last resort; and c) the consequences of the change from quantitative easing to quantitative tightening, in order to return the rate of interest to its historical level.