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ECB Quantitative Easing (QE): Lessons Drawn from QE Experiences Carried out by Other Major Central Banks DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT A: ECONOMIC AND SCIENTIFIC POLICY ECB Quantitative Easing (QE): Lessons drawn from QE experiences carried out by other major central banks Monetary Dialogue 23 March 2015 COMPILATION OF NOTES Abstract The notes in this compilation prepared by key monetary experts review the asset purchase programmes (Quantitative Easing or QE) undertaken by major central banks of developed countries in recent years, discuss their macroeconomic and financial effects and elaborate on the policy messages relevant for the euro area that can be drawn from these experiences. The notes have been requested by the Committee on Economic and Monetary Affairs (ECON) of the European Parliament as an input for the March 2015 session of the Monetary Dialogue between the Members of the ECON Committee and the President of the ECB. IP/A/ECON/NT/2015-01 March 2015 PE 587.289 EN This document was requested by the European Parliament's Committee on Economic and Monetary Affairs. AUTHORS Daniel GROS, Cinzia ALCIDI, Willem Pieter De GROEN (CEPS, Centre for European Policy Studies) Andrew HUGHES HALLETT (School of Economics and Finance, University of St Andrews) Klaus-Jürgen GERN, Nils JANNSEN, Stefan KOOTHS, Maik WOLTERS (Kiel Institute for the World Economy) Christophe BLOT, Jérôme CREEL, Paul HUBERT, Fabien LABONDANCE (OFCE, Observatoire Français des Conjonctures Économiques) RESPONSIBLE ADMINISTRATOR Dario PATERNOSTER EDITORIAL ASSISTANT Irene VERNACOTOLA LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR Policy departments provide in-house and external expertise to support EP committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny over EU internal policies. To contact the Policy Department or to subscribe to its newsletter please write to: Policy Department A: Economic and Scientific Policy European Parliament B-1047 Brussels E-mail: [email protected] Manuscript completed in March 2015 © European Union, 2015 This document is available on the internet at: http://www.europarl.europa.eu/committees/en/econ/monetary-dialogue.html DISCLAIMER The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy. Quantitative Easing (QE): Lessons drawn from QE experiences carried out by other major central banks ____________________________________________________________________________________________ CONTENTS INTRODUCTION 4 1. LESSONS FROM QUANTITATIVE EASING: MUCH ADO ABOUT SO LITTLE? 7 by Daniel GROS, Cinzia ALCIDI, Willem Pieter De GROEN 2. LESSONS FROM QUANTITATIVE EASING 41 by Andrew HUGHES HALLETT 3. QUANTITATIVE EASING: WHAT ARE THE KEY POLICY MESSAGES RELEVANT FOR THE EURO AREA? 61 by Klaus-Jürgen GERN, Nils JANNSEN, Stefan KOOTHS, Maik WOLTERS 4. THE QE EXPERIENCE: WORTH A TRY? 85 by Christophe BLOT, Jérôme CREEL, Paul HUBERT, Fabien LABONDANCE PE 587.289 3 Policy Department A: Economic and Scientific Policy ____________________________________________________________________________________________ INTRODUCTION The European Central bank (ECB) announced on 22 January a comprehensive programme of Quantitative Easing (QE) , which will include the purchase of bonds issued by euro area central governments, agencies and European institutions. QE broadly refers to large-scale asset purchases conducted by a central bank in order combat low inflation, keeping interest rates low, thereby fostering risk taking and, ultimately, reinvigorate growth. QE mainly works through three channels. The first is a portfolio rebalance channel, whereby investors replace government bonds they sell to the central bank with other riskier assets, thereby pushing up the prices of those assets and domestic spending. The second way QE works is by signaling to markets that the central bank plans to keep policy rates low for a long time. Third, the portfolio rebalancing and signaling channels eventually contribute to a weakening of the currency, making exports more attractive. While economists broadly agree on the above transmission channels of QE, there is disagreement on the extent to which purchases of government debt influence prices of other assets as well as on its macroeconomic effects . By and large, however, asset purchases tend to have sizeable effects on financial markets, while the effects on the real economy seem to be more uncertain. The notes in this compilation prepared by key monetary experts review the asset purchase programmes (Quantitative Easing or QE) undertaken by major central banks of developed countries in recent years, discuss their macroeconomic and financial effects and elaborate on the policy messages relevant for the euro area that can be drawn from these experiences. The main conclusions and policy recommendations are summarised below. The notes have been requested by the Committee on Economic and Monetary Affairs (ECON) of the European Parliament as an input for the March 2015 session of the Monetary Dialogue between the Members of the ECON Committee and the President of the ECB. Daniel Gros et al., (CEPS). It appears that QE in the euro area is very important for financial markets, but the impact on the real economy remains to be seen and will be difficult to disentangle from other effects, such as the lower oil price. As far as inflation is concerned, an increase, even if modest, seems to appear in market-based inflationary expectations (e.g. swap rates). By contrast survey-based inflationary expectations (like consensus) had been falling in January, signalling no unambiguous effect. The proposition that a reduction in the availability of long-term dated government debt for the private sector provides evidence that QE is working would imply that a large fiscal deficit financed by the issuance of debt will also have a strong impact on longer-term interest rates (and the exchange rate). From a fiscal point of view, the public sector purchase programme (PSPP) of the ECB is (to about 80%) equivalent to a set of active debt-management policies pursued in parallel at the national level by the participating NCBs, which are effectively reducing the maturity of the existing national debt. As a consequence, national debt offices can then affect the effectiveness of QE on the real economy. Andrews H. Hallett (University of St. Andrws). The practical experience of those who have tried QE in the past (US Federal Reserve, Bank of England, Bank of Japan) is fairly uniform: a small but significant increase in GDP of around ¼%-½% each year. This may be enough to arrest a decline, but probably not enough to start a recovery. But the impact on prices seems to have been negligible (<0.1%) in each case. QE may cause the currency to depreciate. But this is likely to have little effect because capital outflows will offset the ability to lower interest rates, cancelling out any increase in net exports. Given small impacts, the indirect effects of liquidity provision, market stabilisation and lower 4 PE 587.289 Quantitative Easing (QE): Lessons drawn from QE experiences carried out by other major central banks ___________________________________________________________________________________________ uncertainty are likely to be the more important benefit of QE. In particular reduced risk premia offer a way to reduce borrowing and refinancing costs for distressed governments or businesses in depressed areas. Since EU interest rates are very low already, there is not much scope for engineering a generalised fall in interest rates. Reducing risk premia offers a better chance of a successful QE programme. Important for the Euro area, a judicious choice of assets to be bought can be used to reduce risk premia on debt of distressed governments or on corporate bonds (given that inefficiencies, market imperfections or other frictions must have caused the risk premia in the first place). The central bank has to decide whether its priority is to generate a general recovery or to distribute its policy effects to relieve depression in poorly performing areas. QE seems to have led to greater inequality, the material gains going disproportionately to the wealthy. Klaus-Jürgen Gern et al., (Kiel Institute for the World Economy). There are at least three aspects important when evaluating QE. The risks of extraordinarily accommodative monetary policy increase, the longer it is in place, the more expansionary it is, and the more monetary policy enters uncharted territory. Monetary policy and, therefore, QE, is less effective in stimulating the economy in the aftermath of balance-sheet recessions. The potential gains of further monetary stimulus are reduced when interest rates are already at very low levels and financial market distress is alleviated. Overall, the first round QE programmes were successful in restoring confidence on the financial markets and in reducing uncertainty and financial stress. Given the high risk that the financial market turmoil would have intensified, leading the economy into a much deeper recession, these QE programmes were largely appropriate from the current perspective. The second round QE programmes most likely did not have significantly macroeconomic effects, as monetary policy is typically less effective in the aftermath of balance-sheet recessions and when interest rates and
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