Unconventional Monetary Policies and the Macroeconomy: The Impact of the UK's QE2 and Funding for Lending Scheme

TY - JOUR

T1 - Unconventional Monetary Policies and the Macroeconomy

T2 - The Impact of the UK's QE2 and Funding for Lending Scheme

AU - Churm, Rohan

AU - Joyce, Michael

AU - Kapetanios, George

AU - Theodoridis, Konstantinos

PY - 2018/10/24

Y1 - 2018/10/24

N2 - In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional Quantitative Easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler Auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank's QE purchases during 2011-12 and the initial phase of the FLS each boosted GDP in the UK by around 0.5%-0.8%. Their effect on inflation was also broadly positive reaching around 0.6 pp, at its peak.

AB - In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional Quantitative Easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler Auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank's QE purchases during 2011-12 and the initial phase of the FLS each boosted GDP in the UK by around 0.5%-0.8%. Their effect on inflation was also broadly positive reaching around 0.6 pp, at its peak.

KW - Bayesian Methods

KW - Large-Scale Asset Purchases

KW - Quantitative Easing

KW - Funding for Lending Scheme

KW - Vector Autoregressions

KW - Auto-Regressive Distributed Lag

U2 - 10.1016/j.qref.2018.10.004

DO - 10.1016/j.qref.2018.10.004

M3 - Article

SN - 1062-9769

JO - QUARTERLY REVIEW OF ECONOMICS AND FINANCE

JF - QUARTERLY REVIEW OF ECONOMICS AND FINANCE

ER -