Did QE Work? We Assess A Decade of Evidence

At a Glance

  • Central banks resorted to quantitative easing to shore up economies stricken by the 2008 financial meltdown, but a decade of data shows that their efforts went largely unrewarded.

When it comes to quantitative easing (QE), it’s either go deep or go home. Using nearly a decade of evidence, we look at what impact QE had in the United States, UK, Eurozone and Japan.  Despite all the hopes and fears generated by the asset-purchase programs of central banks to stimulate their economies, for the most part, QE had no actual impact on growth. Therefore, there is no reason to fear the ending of QE or its reversal.

There is one major caveat though. Unlike in the U.S. or Europe, QE may have helped Japan recover, perhaps because of the gargantuan nature of the Bank of Japan’s (BoJ) asset-purchase program. Or, more likely because the BoJ targeted part of its QE where it really mattered – corporate debt and equities.

Evaluating the impact of QE1 in the U.S., which began in 2008, is nearly impossible.  At the time, a number of other events and policy changes were taking place, including the bank and auto bailouts, advent of zero interest rates, the stimulus package and an accounting change that allowed banks to hold assets on their books to maturity at cost rather than marking them to market. Had all of these taken place in the absence of QE1, would the economy have recovered as it did? At the time, it was anybody’s guess.

So far as we can tell, QE2 had little or no impact on the pace of the economic expansion. QE3 began in mid-2012 and ran through the early part of fall in 2014. By all appearances it, too, had no impact.  Neither did ending it.

The Eurozone Experience

The European Central Bank’s (ECB) QE program differs from the Fed’s in a few key aspects:

1)Timing: The timing of the balance-sheet expansions and contractions were completely independent of the Fed.

2)Multiple sovereigns: The ECB had to buy bonds issued by over a dozen sovereign nations, whereas the Fed only had to buy from one government.

3)Credit quality: the ECB went lower in terms of credit quality than the Fed, which stayed with AAA securities.

For all these differences, the lack of obvious economic impact remains the same.

The ECB expanded its balance sheet significantly in 2008 and the economy began to rebound in late 2009. Even so, the rebound may have been due more to a vast expansion of fiscal deficits and the ECB cutting rates from 4.5 percent to 1 percent. Then in 2011, the ECB began a sort of QE2 (although it didn’t call it that). Did this help the Eurozone economy? Absolutely not. In 2012, the ECB completely reversed course. Its new chairman, Mario Draghi, promised to do whatever was needed to prevent Spain, Italy, Portugal and Ireland from defaulting on their debts. And, the ECB began cutting rates and eventually brought them to zero. Finally, in 2014 with a recovery underway, the ECB began a massive bond-buying program that continues to this day.

The UK Experience

In many respects the UK’s experience of the 2008 crisis is similar to that of the U.S. The banking system suffered but the central bank got rates below 1 percent quickly and kept them there; the government implemented a large fiscal stimulus in 2009 followed by a long period of austerity. As is the case with the Fed, the BoE’s QE1 is difficult to evaluate because it occurred at a time when so many other policy changes were taking place. BoE’s QE2 and QE3 produced no discernable acceleration in GDP growth.

Japan: The Contrarian (Sort of) 

Like the rest of the world, the 2008 crisis hit Japan’s GDP hard. The Bank of Japan (BoJ) responded with a mild QE that took the balance sheet back up to 30 percent of GDP from 20 percent between 2009 and 2012. It was to little avail. Then in 2013, something radical happened. The BoJ dispensed with its minor purchases of government bonds and conducted a vast QE, taking its balance sheet from 30 percent to nearly 100 percent of GDP. Economic growth remained solid but didn’t necessarily accelerate.

For a full version of this article, please visit https://www.cmegroup.com/education/featured-reports/did-quantitative-easing-help-spur-growth.html

Erik Norland is a Senior Economist at CME Group.

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