There is little to show in terms of the economic benefits of QE, but there are plenty of costs. Now central banks find their hands tied as they try to curb inflation with interest rate increases and quantitative tightening, which means no more purchases of long-term bonds and mortgage-backed securities. But they’re finding that ending QE can itself be a threat to financial stability.
During the 2008 financial crisis, central banks were desperate to inject liquidity into the financial system. With the policy interest rate at zero, it needed to figure out another mechanism, so it bought long-term bonds and mortgage-backed securities, ballooning its balance sheet. That was supposed to be an emergency measure, but it went on for years. QE was followed by QE2 and then QE3 as the Fed became fearful that stopping would crash the bond markets.
About a decade later, just as the Fed’s balance sheet finally started to shrink, along came the pandemic and the biggest QE ever. It lasted well after the immediate crisis passed, even as inflation and the housing market started to heat up.
Looking objectively at the evidence, it’s still not clear that all this bond buying ever did much for the economy. As Ben Bernanke once said, “The problem with Quantitative Easing (QE) is that it works in practice but not in theory.”
In cases where a market is in trouble, having the central bank step in and buy bonds can provide needed liquidity. But using QE to boost the entire economy, to lower unemployment or boost inflation, has a more dubious record. One study, called Fifty Shades of QE, assessed the many research papers that measure the impact of QE on the economy. It found that all the research coming from central banks view QE as a great success, but only half of the research from academics finds any benefits to economic output or inflation. When they do find some benefit, it tends to be smaller than the bank research claims.
