This week I attended a conference hosted by the Federal Reserve Bank of St. Louis on quantitative easing. The purpose of the conference, as explained by Bank President James Bullard in his opening remarks, was to answer Stanford Professor John Taylor’s challenge to provide research of real-time usefulness to policy makers. The conference featured analyses by 5 different research teams of the effects of recent quantitative easing measures adopted in the United States and United Kingdom.
Here are the 5 papers presented at the conference, 4 of which we’ve already called to the attention of readers of Econbrowser (with links to Menzie’s and my earlier discussions provided for convenience):
Large-Scale Asset Purchases by the Federal Reserve: Did They Work? by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack (see Econbrowser October 2010).
The Large-Scale Asset Purchases Had Large International Effects by Chris Neely (see Econbrowser July 2010).
The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment, which is my paper with Cynthia Wu (see Econbrowser August 2010, December 2010, and February 2011).
The Financial Market Impact of Quantitative Easing by Michael Joyce, Ana Lasaosa, Ibrahim Stevens and Matthew Tong.
Flow and Stock Effects of Large-Scale Treasury Purchases by Stefania D’Amico and Thomas King (see Econbrowser October 2010).
The conference began with a summary by Federal Reserve Bank President James Bullard of what the Fed was trying to accomplish with QE2 and the effects he believes the program had. Bullard suggested that the Fed’s goal of the large-scale asset purchases initiated in November 2010 was to make sure that the United States did not repeat the policy errors made by Japan. Bullard began by noting research by Jess Benhabib, Stephanie Schmitt-Groheb and Martin Uribec on some additional reasons an economy could get stuck in a liquidity trap. The diagram below, taken from Bullard’s presentation, plots a Fisher relation (higher nominal interest rates are associated in long-run equilibrium with higher inflation) as the straight dashed line. The Taylor Principle calls for increasing the Fed’s target interest rate more than one-for-one in response to higher inflation, as represented by the upward-sloping section of the solid black curve. But because of the zero lower bound on interest rates, that means globally the Taylor Rule has to look like the indicated curve, with a bad equilibrium associated with a zero interest rate. The actual U.S. data are represented by blue squares. Bullard noted that whatever you want to make of the theory, the practical experience is that Japan seems very much to have been stuck in the bad equilibrium, as represented by the green circles.
Bullard argued that Chairman Bernanke had communicated the Fed’s intention to implement QE2 in his speech at Jackson Hole August 27, and that the effects had been fully priced in by markets by the time the actual bond purchases began in November 3. That was also the interpretation I had offered at the time. Bullard felt that the changes in the fall of 2010 were in the direction that the policy might have been expected to achieve. Expected inflation increased between August 27 and November 3.
The dollar depreciated.
Real interest rates declined.
And equity prices increased.
I believe it is quite accurate to say that many of us were concerned last summer about the danger of the U.S. repeating the Japanese experience, that those concerns have since been reduced, and that the stance of the Federal Reserve is one reason those concerns have been reduced. This does not mean that the Fed solved all our problems, and I never believed that it could. But I believe the Fed did avoid making our problems worse.