Working Paper: CEPR ID: DP18463
Authors: Tomasz Wieladek
Abstract: I study the inflation response of QE relative to the same size conventional monetary policy shock in VAR models for the Euro Area, UK and US. I use eight different measures of QE used in previous QE VAR studies. The results consistently show that QE has a 2-4 times larger short-term effect on inflation than conventional monetary policy in the UK and the US, but not in the Euro Area. An analysis of the transmission mechanism suggests that stronger household inflation expectations, money supply and exchange rate responses are behind the larger inflation effect of QE. Meta-analysis of 82 previous conventional monetary policy and QE VAR studies reveals similar results: QE has a 2-4 times larger effect on inflation than conventional monetary policy in the UK and US, but not the Euro Area. This suggests that the conclusions of this paper are a general finding of the VAR literature and hence likely robust to different methodological choices.
Keywords: QE; Monetary Policy; Inflation
JEL Codes: E50; E51; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| QE (E01) | inflation (E31) |
| conventional monetary policy (E52) | inflation (E31) |
| QE (E01) | household inflation expectations (D19) |
| QE (E01) | money supply responses (E51) |
| QE (E01) | exchange rate reactions (F31) |
| differences in inflation transmission mechanisms (F42) | inflation (E31) |
| QE (E01) | higher inflation expectations (E31) |
| QE (E01) | substantial increase in broad money supply (E51) |