An Unconventional Approach to Evaluate the Bank of England’s Asset Purchase Program

Abstract

Empirical papers analysing the transmission of (unconventional) monetary policy typically rely on a vector autoregressive framework. In this paper, I complement these studies and employ a matching approach to examine the impact of the Bank of England’s asset purchase program on macroeconomic quantities in the UK. My sample covers the period March 2001−December 2015 and five small open inflation targeting economies. Using entropy balancing, I create a synthetic control group comprised of credible counterfactuals for the sample of observations subject to quantitative easing (QE). My key results indicate that a 100 bn GBP increase in QE has a significant and positive effect on GDP growth with a peak effect of 0.66−0.69 percentage points (pp) after 30 months. The same increase leads to a reduction in the inflation gap with a peak effect between −0.77 and −0.94 pp after 30 months. An in-depth analysis reveals that the latter finding is not driven by the choice of the empirical methodology. In contrast, I find that the returns on QE in the UK are decreasing (i) over time and (ii) with the volume of QE. Consequently, monetary policymakers should be aware of the fact that the returns on QE might be non-linear and that QE eventually could have detrimental effects.

Appendix

Fig. 2

Macroeconomic Data. Source: Bank of England (asset purchases), OECD (interest rates, GDP growth, unemployment rate, and inflation rate), and BIS (credit growth). Vertical lines refer to March 2009