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Quantitative Easing · 5 of 9

The Evidence on Quantitative Easing

Explain what the Bank of England's own economists estimated the purchases did to output and inflation, why the effect depends on whether markets are in crisis, and why the Lords committee and the Bank disagreed.

Before you start

What you'll be able to answer

  1. What do the Bank of England's own economists say the first round of purchases did to output and inflation?
  2. Why might the same purchases work better at some times than others?
  3. Why did a House of Lords committee and the Bank of England disagree about the purchases?

Where this sits

Quantitative Easing · this module is lit

  1. 1998The Bank of England Act gives interest rate decisions to a committee at the Bank; the Chancellor keeps the target
  2. Mar 2009Bank Rate is cut to 0.5 per cent, and the Bank starts buying government bonds with newly created money
  3. Aug 2013The Bank says it will not consider raising interest rates at least until unemployment falls to 7 per cent
  4. Mar 2020Bank Rate is cut to a new low
  5. Jan 2022Banks' reserves at the Bank reach their highest level
  6. Sep 2022The Bank buys government bonds again, to stop forced selling by pension funds
  7. Oct 2022Consumer price inflation reaches 11.1 per cent
  8. Nov 2022The Bank starts selling its bonds to investors, among the first central banks to do so
  9. Aug 2023Bank Rate reaches its peak after rises at consecutive meetings
  10. Apr 2026The Governor writes an open letter to the Chancellor after inflation overshoots the target

A Lords committee asked what twelve years of buying had done

In July 2021 the Economic Affairs Committee of the House of Lords published a report with a question for its title: "Quantitative easing: a dangerous addiction?" The Bank of England had been buying gilts, the government's bonds, on and off since 2009, and it was still buying. The committee had taken evidence from economists in Britain and abroad. It wanted to know what all that buying had done for output and prices, and who could say.

Predict first

Economists at the Bank of England estimated how much the first round of buying raised the country's output. How large do you think their estimate was?

The Bank's economists put the first round's effect on inflation equal to a large rate cut

In 2011 three Bank of England economists estimated what the first £200 billion of purchases, made by January 2010, did. On their account, the purchases cut long-term interest rates and raised asset prices. That, they argued, raised spending, then output, then prices.

Using models to estimate what would have happened without the purchases, they put the peak effect at 1.5 to 2 per cent more output and ¾ to 1½ percentage points more inflation. As a yardstick, they reckoned the same rise in inflation would have needed a Bank Rate cut of 150 to 300 basis points, a basis point being a hundredth of a percentage point. In 2009 Bank Rate was already 0.5 per cent, effectively as low as it could go. The Bank's Monetary Policy Committee, which sets interest rates, judged that otherwise spending would be too weak to hit the target, so it began buying gilts.

Predict first

Researchers compared studies of quantitative easing written by economists at central banks with studies written by academic economists. Which reported larger effects on output?

Central bank studies find larger effects than academic ones

In 2020 Brian Fabo, Martina Jančoková, Elisabeth Kempf and Ľuboš Pástor compared the two kinds of study for the National Bureau of Economic Research, a US research body. Papers by central bank economists reported larger effects of quantitative easing on output and inflation than papers by academic economists did. Central bank economists reporting larger effects on output also tended to do better in their careers. The paper first circulated under the title "Fifty Shades of QE: Conflicts of Interest in Economic Research".

The Bank of England's own Independent Evaluation Office, which reports to the Bank's board, added a caution in 2021. There is less research on the effect on output and inflation than on bond yields, it said, because those effects take longer to appear and are harder to separate from everything else. So the research behind estimates for output is thinner than for borrowing costs, the office found.