Quantitative Easing: A Postmortem

Abstract

The unconventional monetary policy of the Federal Reserve (Fed) during the global financial crisis of 2007–2009 and its aftermath is often credited with averting another Great Depression. The Fed’s interventions unfolded over two periods, which can be distinguished with regards to the particular tools employed and goals pursued. Lowering risk and liquidity premiums by propping up the prices of private assets was deemed essential for restoring the flow of credit and the orderly function of financial markets during the first period and in the early months of the second period. Reducing interest-rate spreads for the purpose of lowering borrowing costs and boosting total spending in the economy became a major goal of monetary policy during the second period. The purpose of monetary policy changed over time, but the targeted channels of its effects remained largely unaltered. While conventional monetary policy targets interest rates, unconventional monetary policy targeted asset prices. Starting with an overview of the two periods in the conduct of monetary policy, this article explores the theoretical justifications and practical implications of unconventional monetary policy. It further interrogates the effects of the Fed’s policies on government bond yields and asset prices as well as their macroeconomic and distributional effects. A key observation is that the effects of quantitative easing have been most acutely felt not in a revival of domestic investment and employment but in the staggering distortions in asset prices domestically and globally. The macroeconomic effects of unconventional monetary policy pale in comparison with its distributional effects.

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