What Problem Is Post-Crisis QE Trying to Solve?

Paul Atkinson and Adrian Blundell-Wignall
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Paul Atkinson: Board, Association of Americans Resident Overseas (AARO), 75006 Paris, France
Adrian Blundell-Wignall: School of Economics, Faculty of Arts and Social Sciences, Camperdown, Sydney, NSW 2006, Australia

JRFM, 2022, vol. 15, issue 2, 1-17

Abstract: What problem the Fed and other central banks are solving by printing money and letting interest rates fall to zero is the focus of this paper. This activity does not appear to affect nominal GDP or inflation prior to COVID, and yet central bank liabilities have continued to rise. This suggests the presence of rising cash demand that has prevented excess cash and inflation pressures from emerging. While there was some hope that quantitative easing would be a new instrument in addition to interest rates as far as monetary policy goals were concerned, this has not proved to be the case. Instead, banking system demand for central bank liabilities keeps rising as an endogenous response to the changed business models of banks forced on them by post-crisis re-regulation and extremely low interest rates. These ideas were tested with cointegration and error correction econometric techniques. Examples of the growing risk of leverage and counterparty risks in this disequilibrium process are provided.

Keywords: monetary policy; quantitative easing; QE; financial regulation; Liquidity Coverage Ratio; demand for bank reserves; central bank money; cointegration; Archegos; derivatives; rehypothecation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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