Unconventional monetary policies and the macroeconomy: the impact of the United Kingdom's QE2 and Funding for Lending Scheme

Rohan Churm, Michael Joyce, George Kapetanios and Konstantinos Theodoridis

No 542, Bank of England working papers from Bank of England

Abstract: In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional quantitative easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank’s QE purchases during 2011–12 and the initial phase of the FLS each boosted GDP in the United Kingdom by around 0.5%–0.8%. Their effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.

Keywords: Bayesian methods; large-scale asset purchases; quantitative easing; Funding for Lending Scheme; vector autoregressions; auto-regressive distributed lag. (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 E58 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-08-14
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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