Evaluating Quantitative Easing

Federal Reserve, monetary policy, monetary stimulus, quantitative easing

Quantitative Easing, Federal Reserve, monetary policy, monetary stimulusIn my prior post, “The Futility of Stimulus,” I examined whether Federal Reserve Policy has provided economic stimulus.  I employed standard measures of money-supply growth to evaluate the question.  I concluded that Federal Reserve policy has resulted in less expansion of the money supply than would normally be expected.  The weakness of the current economic expansion testifies to that.

In this post, I employ an alternative measure of monetary stimulus.  I rely on a recent lecture at the University of Nevada Reno by Professor John Taylor of Stanford University.  With a series of charts, he made a convincing case that successive rounds of Quantitative Easing provided no monetary stimulus.  Taylor looked at the interest-rate channel, particularly longer-term interest rates.  If monetary policy stimulates the economy through real capital investment, then we must look to longer-term interest rates.

Taylor specifically examined the effects on 10-year Treasury yields of each round of Quantitative Easing by the Fed.  In each case, there was an announcement effect.  When the Fed announced a new round of bond purchases, interest rates on 10-year Treasuries did drop.  As QE was executed, however, the 10-year rate recovered to its previous level or even moved higher.  On the assumption that rates on corporate bonds price off Treasuries, there was no measureable effect on investment and economic growth.  Again, the weakness of the economic expansion is consistent with Taylor’s argument.

There is policy background here.  Taylor is the author of a monetary rule, which others have dubbed the Taylor Rule.  It is a rule for adjusting short-term interest rates (the Fed Funds rate) to changes in inflation and real economic activity.  The Taylor Rule calculates that the Fed Funds should by 1.5 percent versus the current reality of near-zero.  Taylor did not advocate an immediate increase to that level, but the beginning of gradual increases.

What of the economic recovery?  If Taylor is correct, then low short-term interest rates have not contributed to the economic expansion and raising them will not slow economic growth.

Have very low short-term interest rates had any effect?  Janet Yellen recently hinted they might have contributed to unsustainably high equity prices.  I will not argue with the Fed Chair on that point, but only suggest that other financial bubbles may also have been financed by Fed policy.  To repeat a hackneyed phrase (nonetheless accurate), Wall Street has benefitted but not Main Street.

To sum up, following Taylor’s analysis of the interest-rate channel, I conclude that Fed policy has not stimulated economic growth.  It has had consequences, which some would consider undesirable.  Taylor has provided a reasonable case for beginning to raise interest rates.  I doubt that will happen soon.  But the debate should continue.


  • joebhed

    Whenever I read one of these ‘extended observation’ types of
    economic policy analysis, I always look for the takeaway first, then whether
    and how well that takeaway was conveyed from the narrative.

    Here, as earlier, Gerry O’Driscoll’s takeaway is that QE has
    not worked to stimulate national economic ‘demand’.
    (Yes, we must agree that QE is little more than a “do SOMEthing” initiative for policy-constrained CBers).

    But the Taylor Rule should be scrapped ASAP.
    It is inadequate to imply any different national economic growth/activity level from a 1.5 percent FFR.

    “”To sum up, following Taylor’s analysis of the interest-rate channel, I conclude that Fed policy has not stimulated economic growth.””
    Really, Gerry?
    Absent the Taylor Rule, you might have concluded otherwise?

    I prefer the pudding-tasting method.
    This QE pudding tastes like a decade-long recession.
    End of story.
    More importantly, what is Gerry’s policy ‘solution’?

    How ‘bout “helicopter money”, a.k.a. Overt Money Financing ??
    Might that not actually work?

    " the debate should continue"
    For sure.

    • Robert Bostick

      .Helicopter money is the solution for any financial crisis

      • joebhed

        'helicopter money' has become the pseudonym for exogenous money creation and issuance.
        BTW, these proposals can only resolve the monetary crisis; resolving the financial crisis is left for those who created it).
        We can move on to the major reform proposals (some mentioned here, but none involve independent central bank policy initiatives) , all of which act upon the need for 'demand' in the economy – a 'demand' that cannot move forward without additional purchasing power – purchasing power which can only move forward with increased spending – spending which is NOT manifesting in the private sector – so that public sector purchasing power must be implemented.
        Call it what you want.
        Got any better ideas?

        • Robert Bostick

          Yes, "If" QE for Main St. was the preferred plan it would have delivered transportation, public housing, infrastructure, jobs programs, basic minimum income programs, gov financed minimum wage or topping off programs, etc.

          Now, most reasonable observers admit the stimulus was too small, that aggregate demand was in need of a much larger boost, that the FICA should have been suspended in its entirety, and that the sequester was a terrible blunder.

          It's too late now as we slide back into general economic stagnation which appeared to dissipate in the first quarter until the adjusted numbers revealed we weren't really out of the woods. There's been an uptick for April-May in retail sales but industrial production overall is still sliding downhill.

          So yes, we need a huge input from public spending. Afterall, public deficit spending does create net financial assets in the private sector, and without them we are certain to face resurgence of recession. Deficit hawks need to understand that wherever there's a deficit there's a surplus and their constant bleating to cut the deficit produces a similar cut, to the penny, in private sector net surplus dollars.

          • joebhed

            Robert, Thanks.
            Sorry, but the times they’re a changing.
            I agree with a great deal of your observation here, but none
            of that MMT-Mosler ‘net financial assets’ crapola. Gawd.

            What we need to solve the problems in the real economy, where the Ninety Nine percent live, work and spend, is “money”, its quality being economic “purchasing power” in the cash-flow, operating statement (revenue-expense) sector of the economy…….. which would add demand, IRRESPECTIVE of the sum of balance sheet, financial asset amounts. Do you really think that more financial assets can get the economy going??

            Sorry, I long ago schooled myself on MMT and today reject every one of its tenets.
            The government is NOT the monopoly issuer of the currency.
            The government NEEDS taxes and other incomes to pay its
            Bills, including public debt issuance proceeds.
            Sectoral balances are a (So What?) national accounting truism, and add nothing to our understanding of either fiscal or monetary public policy initiatives.
            MMT becomes the "excuser" theory for increasing totally unnecessary public debt.

            When Warren convinced the fledgling cadre of MMT-organizers that the bankers’ school money system of fractional-reserve banking and debt-contract (monetary [financial] asset) based “money” issuance was ‘fine’ but only needed some informed tweaking, he took the needed progressive solution off the tracks. I do fault Warren for that.

            Progressive solution equals public money (opposite of debt-contract based PRIVATE money) and I’m sorry if you think MORE net financial assets are going to add one iota of relief to the Ninety-Nine Percent (The Restofus).
            It is not.
            MMT was.
            Progressive money system reform is coming right at you.
            Get out of the new road if you can’t lend a hand.
            For the Money System Common.

          • Robert Bostick

            Joebhed. It's not like you to reject out of hand accounting identies/axioms which form the basis of our national income accounting methodology. Please read the following to make certain that you under stand what a federal government deficit really is and what it produces in the non-ppublic sector. Gov. spending must go to someone/some entity and after they pay their taxes they are left with net savings/assets. What is it that you don't get? (you wrote, "MMT-Mosler ‘net financial assets’ crapola. Gawd.")


            Yes, more financial assets from government spending can get the economy going. Where do you think government spending goes? When Lockheed gets a $3oo billion contract from the government those government payments go into private sector checking accounts and the holders of those accounts pay their bills, buy groceries, invest, etc. QE is not government spending. QE, through interest paid by the Fed to the Treasur, withdrew nearly $300 billion from the economy. Those are not the financial assets MMT talks about.

            When you say that that sectoral financial balances add nothing to our understanding of fiscal policy you must surely be jesting. When the government takes too much money out of the economy claiming it needs to balance its income and revenue, and it expects the private sector to fill the gap, it is of course ushering in recession, since the private sector cannot borrow indefinitely. The government, however, can deficit spend until full employment is reached. The fundamental point of sectoral financial balances is to demonstrate the limits of fiscal policy. Truisms are valuable rubrics simply because they are irrefutable.

            As for public money, I've long maintained that no nation ever needed a privarte central banking system. I've posted hundreds of comments supporting a return to Lincoln's Greenbacks and universal adoption in the U.S. of the Bank of N. Dakota's system. I don't live in an either/or world. MMT has its good and not so good points. For instance taken to its logical concluion MMT should support Federal government not Federal Reserve issuance of its fiat currency to all political jurisdictions obviating the need for taxation except to control inflation and manage income distribution. A land value tax would serve.

            We are using the same hymnal, from time to time we sing a different hymn.

          • joebhed

            First, thanks for the thoughtful commentary. Wish I could agree on one iota therefof.

            Take New Economics (MMT) Perspectives on the sectoral finance accounting, for instance.

            First, I get a link error message there, but since it is 2011, I likely commented on it back then, when I was permitted to comment on the MMT blogs. Today I am disallowed from commenting on NEP and NakedCapitalism, and the reason is NOT because I don't understand the shtick of MMT, rather because of my conclusion being that it offers exactly a big NOTHING when it comes to reforming anything and fixing what’s wrong.

            Being a forty-year student of the monetary system, I studied MMT for two years before coming to my conclusions. I attended the MMT Teach-In at GWU back in 2010(I think it was)
            It offers NOTHING.
            You can tell me what you think it offers, Robert.

            Sectoral Balance Accounting ……… is taking the SUM of the national economy’s sectors (private, public, foreign) and showing that given a national economic throughput Sum of ONE, the variations of the sectoral-flow sums must be sectorally offset, so that the “surplus” of one sector must equal the deficit of the other sectors. Or else they wouldn’t
            sum to ONE. Gee. So, what? That's arithmetic.
            What do you do with that knowledge? Gain some useless “policy space”? How does that improve our socio-economic well-being?

            It doesn’t …. And so I reject it as a tool for “bettering” anything..
            It unfortunately, and incorrectly, leads to an implication that public debts don’t matter (being merely another public sector metric), when they do matter to the national political-economy.

            But MMTers, the pseudo-progress wing of Heterodoxy in economics, has learned to stop worrying and to love the national debt, inventing good-tasting memes to make it more palatable.
            So what, MMT?
            I love the MMTers,
            They are obviously really good people, but I abhor the scheme that Warren has devised, and that which the faithful have adopted as a theoretical creed. Take the blinders off.
            Look behind the MMT curtain. What is there, Robert? Or, who?

            “”Yes, more financial assets from government spending can get the economy going. Where do you think government spending goes?””

            The question isn’t where the “spending goes, but where the debt (the financial ‘asset’) goes. Nobody spends government debt …. They hold it and collect taxpayer interest.
            I never was really sure why MMT accepts this ….. Bill Mitchell calls for ending it ( as does Warren sometimes when it suits him).

            First of all, Robert, there is no connection between government spending amounts and the need for “public debt” instruments that MMTers fondly hold as “net financial assets”.

            From where do you see it as the job of the federal government to BORROW already existing private monies to spend IN ORDER TO produce new tradable assets for the financialistas, including Warren? Gawd.

            That is NOT the job of government.
            The job of national government is to provide sufficient national circulating media (not debt) to provide the purchasing power needed for consumers to purchase all that is produced.

            That erroneous little MMT meme about “Let’s just have more public debts!” has these, again, pseudo-progressives, clamoring for our government to provide MORE and GREATER debt instruments to the private sector ………. Ostensibly to validate functional finance accounting….. which, by the way, I totally accept.

            But did Lerner call for more debt, or more money-printing?
            If Robert Bostick really cares to understand why we CAN’T advance with more debt, either public or private, ….. then have a read of Adair Turner’s “Overt Money Financing” proposals, here from the Volcker Group of Thirty.


            Robert, I have been studying and striving to understand the money system for forty years.
            Welcome aboard.
            For the Money System Common.


          • Robert Bostick

            joebhed, Thanks for your reply.

            I've tried to address your reply in the order in which you present your viewpoint.

            1. Sectoral Financial Balances, in my view, points to the folly of the Federal government striving for balanced or budget surplus. In our current system more rather than less government spending or tax cuts adds to private sector income and serves as a needed stimulus.

            Simple Accounting 101 is useful in the context of Sectoral Financial Balances precisely because it debunks the lies about deficit spending. It also debunks the lies about national debt since the cumulative deficit is, irrefutably, our national savings.

            We've been calling stuff by the wrong name for mostly political reasons. The simple arithmetic of SFB escapes most 1st year Macro 101 instructors. While what occurs is deficit spending, what is produces is a surplus. Yet, we never hear about the surplus.

            2. MMT is a misnomer, It should be called MMO, Modern Money Operations. It makes no claim to being the economic panacea of the ages. It simply points to a much more cogent approach to THINKING about how our money is created, distributed, taxed, and destroyed.

            How many Americans believe in their heart of hearts that the Federal government must tax before it can spend? How many of these Americans fail to understand what a dollar is and, therefore, believe that the Federal government needs to have revenue per se to spend?

            It helps to be disabused of false notions by plain language presentations and empirical evidence.

            Mosler clears the air on these too often misunderstood facts. What does that do for policy? It should form the basis for acknowledging that all our Federal government needs to complete the act of spending is an appropriation.

            3. Nowhere does MMT imply that Public Debt — Federal Debt doesn't matter.

            What MMT says is that operationally the debt is represented by Treasury securities in savings accounts. MMT describes how that debt can be paid off … changing numbers in checking and savings accounts. It also discusses why failure to understand what the national debt is burdens future generations because of the failure to invest in education and to optimize employment and output.

            Operationally, the national debt is a number on a spreadsheet reflecting amounts held in checking and savings accounts. To increase the national debt the government debits the buyer's reserve account at the Fed. Then it increases the buyer's securities account at the Fed. When it's time to redeem the security the Government simply reverses the process. Debt paid.

            The conventional meme is infinitely more damaging since it's always couched in terms that have the U.S. facing solvency issues. When it comes right down to the operational truth. We have $18 trillion in national savings since none of the dollars used to pay for the securities ever leaves the U.S.

            That then moves the Congressional dialogue toward a rethinking of the purposes of tax policy. For example, we don't need pay roll takes to fund SS, so let's suspend those taxes and if inflation needs to be managed reinstate them in proportion to the amount of dollars needed to be withdrawn from the economy.

            Clearly, the politics of doing so are formidable with so many Americans, wrongly, believing those taxes are needed to fund their benefits.

            The same holds for Federal highway taxes.

            Don't you think a Congress freed from the lie that the government must tax to spend eliminates a significant constraint on fiscal policy? I'm sure those who see Congress as all too willing to spend would view this as the road to national bankruptcy.

            4. I don't view MMT as a "theoretical creed." For me it's a practical framework in which to improve upon policy choices, when faced with economic and social dysfunction. When I hear and read statements about our being unable to do anything about high levels of unemployment nationally, regionally and among sub groups I wretch, knowing that policy choices for the issuer of its own fiat currency are limited only by slavish devotion to gold standard rubrics.

            5. Net financial assets are not government debt. They are dollar balances after taxes are paid. Individuals, households, firms and the trade sector hold net savings and can spend, save and/or invest those dollars as they see fit. We don't define public debt instruments as "net financial assets." If you're alluding to the ability of the Federal government to issue bills rather than bonds, I agree, operationally and functionally, there is no need for debt instruments. See, Ruml, "Taxes for Revenue are Obsolete."

            Also, Goldman's top economist Jan Hatzius predicted that finally, the US would see a real growth acceleration in the second half of 2013.

            There are three great reasons to listen to Hatzius:

            a. He's the top economist at Goldman Sachs. That alone is a reason to take him seriously.

            b. He called the economic downturn. Remember, he got pilloried in 2007 by Ben Stein for saying that housing was going down, and that the economic ramifications would be significant.

            c. He has a framework for analyzing the economy that's rare among Wall Street economists. He uses sectoral financial balances.


            6. If you're alluding to the ability of the Federal government to issue bills rather than bonds I agree. Mosler and others have written that there is no need for Treasury securities in a fiat currency regime.

            7. Nowhere is it written by MMTers that the government must borrow to spend. The Federal government never needs to raise funds in order to spend. It is in no way constrained by revenues from any source no matter how large the deficit or how few taxes are collected.

            It is Congress that unwittingly or not makes the laws on how money is created, not MMT proponents. We simply take existing Government Budget Constraints and prove operationally that bonds are not necessary to fund the government. We like dealing with interpretations that do not reflect reality. A debt free currency does not exist and is not realistic, however much you and I wish it were obtainable in the very near term. http://bilbo.economicoutlook.net/blog/?p=10384

            7. As for Adair Turner, the link produces a 404 error However, I found this at the same site; he wrote, "I will argue in this section that the option of overt money finance (OMF) of fiscal deficits should not be a taboo subject, and that:

            • OMF could in some circumstances be essential and in some others be less harmful than alternative policy tools.

            • It is possible and essential to design institutional constraints and
            rules that would guard against the misuse of this powerful medicine which, taken in large quantities, would undoubtedly become a poison."


            8. We can advance with more debt as long as that debt generates goods and services, expands employment, consumption and investment. Debt devoted to financialization, QE to the nth, is a huge drain on our economy since the Fed pays interest to the Treasury and over the period of QE implementation sucked hundreds of millions from the economy. It did not stimulate Main St., just Wall St.

          • joebhed

            Robert, thanks.
            Sorry, but at this point I am feeling like an over-stayed relative at Dr. Selgin’s place. I have written a reply in WORD to your explanation, for which I am grateful, but am reluctant to post without Dr. Selgin's invitation.

            I am VERY glad to carry on the dialogue with you and give my personal email account at

            If you send me an email, I will reply with my comment and maybe we can spend some time in the learning process associated with Understanding Modern Money … as Dr. Randy calls it.

            Joe Bongiovanni

          • Robert Bostick

            Joe B,

            I have a new phone, one of those I phones and as a reluctant convert from the flip phone, have not taken the time to learn its operations. I saw your response and that you attached a Word document to it. But alas, my large fingers must have swiped or touched something to make it vanish. Would you be so kind as to send it to my email address again. Thank you.

          • joebhed

            Oh, so THAT's why you were reluctant to switch.
            I'll send it along again as soon as Verizon restores my internet service.
            Been out 36 hours now, and I was visiting my sister right now, so I jumped on her computer to check my email.
            Later. (hopefully not 'much' later.)

  • Jesse

    Again, compared to what alternative? This is almost mind-blowing. Wow!

  • Justin Merrill

    "As QE was executed, however, the 10-year rate recovered to its previous level or even moved higher."

    I can picture Scott Sumner barking at you, "Low interest rates signal tight money, so this is what we should expect."

    Rather than assessing QE's effectiveness by its influence on the 10 year T-note, I propose we look at credit spreads. By this standard, the first QE was probably effective, but all the following rounds and other unconventional policies were of little effect or counterproductive (IOR, sterilizing reserves, direct lending etc.).

    Here's a look at some key credit spreads the affect corporate and bank lending: https://research.stlouisfed.org/fred2/graph/?g=1dcS

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