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.

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Fig. 1

Notes

  1. 1.

    See also the top left panel of Fig. 2 in the Appendix. Section 2 provides more background on QE in the UK and other economies.

  2. 2.

    The financial market impact of QE in the UK is documented, inter alia, by Breedon et al. (2012), Christensen and Rudebusch (2012), Joyce et al. (2011a), and Meaning and Zhu (2011).

  3. 3.

    Note that the inclusion of further macroeconomic variables is not feasible as this would violate the condition of perfect covariate balancing.

  4. 4.

    Note that the difference in GDP growth between treated and non-treated units is not statistically significant when focusing on the financial crisis subsample.

  5. 5.

    Note that applying the same exercises in the case of the treatment effects on GDP growth does neither reveal a clear pattern over time nor a distinct non-linearity. The results are available on request.

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Acknowledgments

I wish to thank Yesmine Arousse for excellent research assistance. I am also indebted to two anonymous referees, Tobias Kranz, Florian Neumeier, Peter Tillmann, Arina Wischnewsky, and participants of the Money, Macro and Finance Group 49th Annual Conference in London for their helpful comments on earlier versions of the paper. Financial support from the Deutsche Bundesbank, Hauptverwaltung in Rheinland-Pfalz und dem Saarland is gratefully acknowledged.

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Correspondence to Matthias Neuenkirch.

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Appendix

Appendix

Fig. 2
figure2

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

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Neuenkirch, M. An Unconventional Approach to Evaluate the Bank of England’s Asset Purchase Program. Open Econ Rev 31, 79–94 (2020). https://doi.org/10.1007/s11079-019-09527-9

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Keywords

  • Asset purchases
  • Bank of England
  • Entropy balancing
  • Matching
  • Quantitative easing
  • Treatment effects
  • Unconventional monetary policy

JEL Classification

  • E52
  • E58