Quantitative easing: a sound choice ? Evidence from the theory, past experiences, and the case of the euro area

Abstract

Following the financial crisis, many economists have discussed the necessity of using unconventional monetary policies. These policies have been implemented by four major central banks (the Federal Reserve, the Bank of England, the Bank of Japan and the European Central Bank), but the opinions about their effectiveness remain mixed. More specifically, this paper focuses on the justification and effectiveness of quantitative easing (QE), a specific unconventional monetary policy that aims to increase the central bank’s balance sheet in an unusual way. According to the theory, QE programmes should decrease the long-term interest rates through the portfolio balance channel, which would in turn lead to an increase of investment and consumption in the targeted economy. It should also imply a depreciation of the domestic currency, enabling the country to increase its exports. However, this policy is not riskless and can create financial bubbles. It can also be seen as ineffective, if transmission channels do not function properly. The study of the US and UK cases shows that QE was partially effective, whereas it almost led to no result in Japan. Finally, focusing on the euro area, we can say that QE seems to have lowered long-term interest rates, but has not been sufficient until now to boost the economy. More precisely, there is no clear sign of a portfolio balance channel functioning in the euro area.