Financial crisis and quantitative easing: can broad money tell us anything?

David Cobham and Yue Kang

No 1206, Heriot-Watt University Economics Discussion Papers from Department of Economics, School of Management and Languages, Heriot Watt University

Abstract: When Bank of England (and the Federal Reserve Board) introduced their quantitative easing (QE) operations they emphasised the effects on money and credit, but much of their empirical research on the effects of QE focuses on long-term interest rates. We use a flow of funds matrix with an independent central bank to show the implications of QE and other monetary developments, and argue that the financial crisis, the fiscal expansion and QE are likely to have constituted major exogenous shocks to money and credit in the UK which could not be digested immediately by the usual adjustment mechanisms. We present regressions of a reduced form model which considers the growth of nominal spending as determined by the growth of nominal money and other variables. These results suggest that money was not important during the Great Moderation but has had a much larger role in the period of the crisis and QE. We then use these estimates to illustrate the effects of the financial crisis and QE. We conclude that it would be useful to incorporate money and/or credit in wider macroeconometric models of the UK economy.

Date: 2012
New Economics Papers: this item is included in nep-cba and nep-mon
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Related works:
Journal Article: FINANCIAL CRISIS AND QUANTITATIVE EASING: CAN BROAD MONEY TELL US ANYTHING? (2012)
Working Paper: Financial crisis and quantitative easing: can broad money tell us anything? (2012)
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