Daniel Thornton on QE

The analysis presented here suggests that QE had little or no effect in reducing long-term yields relative to what they would have otherwise been.² If QE did not significantly reduce long-term yields relative to what they would have otherwise been, it cannot have increased output or employment either.

I’m old enough to recall when the St Louis Fed had monetarist leanings.  A monetarist would immediately reply that interest rates are a lousy indicator of the stance of monetary policy.  But this statement isn’t even consistent with New Keynesian models.  After all, QE could easily raise the Wicksellian equilibrium interest rate in a NK model, and hence boost AD even if actual interest rates did not change.  Thus the term ‘cannot’ is way too strong.  What if the Fed had done Zimbabwe-style QE.  Would you expect interest rates to fall?  Would NGDP growth rise?

I’m also puzzled as to why he looks at time series data and not market reactions to policy announcements.

Elsewhere Thornton acknowledges that there are other possible mechanisms:

Another possibility is that other countries experienced a greater output decline relative to that of the United States, which caused their yields to decline compared with the United States. The second chart shows the gross domestic product (GDP) growth rates of Canada, France, Germany, the United States, and the United Kingdom since 2005. The GDP growth patterns of four of the five countries have been similar since the fourth quarter of 2008; the sole exception is France, whose growth declined more. Hence, it appears unlikely that divergent growth rates could account for the lack of support for QE.

Lots of puzzles here.  Surely US growth has exceeded British growth by a wide margin.  In any case, Britain also did lots of QE, so why make this comparison? Germany and France don’t even have their own monetary policies; they are part of the eurozone. And growth in the eurozone has been far below US levels, presumably due to the ECB’s unwillingness to be as expansionary as the Fed. Indeed they raised interest rates twice in 2011.

PS.  Off topic, but notice all the chatter about how unemployment is not a useful policy guide for the Fed.  Who argued the Evan’s rule should have been based on levels of NGDP.  I hate love to say I told you so . . .

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