Ten QE Questions

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Most observers regard unconventional monetary policies suchas quantitative easing (QE) as necessary to jump-start growthin today’s anemic economies. But questions about the effectiveness and risks ofQE have begun to multiply as well. In particular, ten potential costsassociated with such policies merit attention.
First, while a purely “Austrian” response (that is,austerity) to bursting asset and credit bubbles may lead to a depression, QEpolicies that postpone the necessary private- and public-sector deleveragingfor too long may create an army of zombies:zombie financial institutions, zombie households and firms, and, in the end,zombie governments. So, somewhere between the Austrian and Keynesian extremes,QE needs to be phased outover time.
Second, repeated QE may become ineffective over time as thechannels of transmission to real economic activity become clogged. The bond channeldoesn’t work when bond yields are already low; and the credit channel doesn’twork when banks hoardliquidity and velocity collapses. Indeed, those who can borrow (high-gradefirms and prime households) don’t want or need to, while those who need to –highly leveraged firms and non-prime households – can’t, owing to the credit crunch.
Moreover, the stock-market channel leading to asset reflation following QEworks only in the short run if growth fails to recover. And the reduction inreal interest rates via a rise in expected inflation when open-ended QE isimplemented risks eventually stokinginflation expectations.
Third, the foreign-exchange channel of QE transmission –the currency weakening implied by monetary easing – is ineffective if severalmajor central banks pursue QE at the same time. When that happens, QE becomes azero-sum game, because not all currencies can fall, and not all trade balancescan improve, simultaneously. The outcome, then, is “QE wars” as proxies for“currency wars.”
Fourth, QE in advanced economies leads to excessive capitalflows to emerging markets, which face a difficult policy challenge. Sterilizedforeign-exchange intervention keeps domestic interest rates high and feeds the inflows. But unsterilized interventionand/or reducing domestic interest rates creates excessive liquidity that canfeed domestic inflation and/or asset and credit bubbles.
At the same time, forgoing intervention and allowing the currency toappreciate erodesexternal competitiveness, leading to dangerous external deficits. Yet imposingcapital controls on inflows is difficult and sometimes leaky. Macroprudentialcontrols on credit growth are useful, but sometimes ineffective in stoppingasset bubbles when low interest rates continue to underpin generous liquidityconditions.
Fifth, persistent QE can lead to asset bubbles both whereit is implemented and in countries where it spills over. Such bubbles can occurin equity markets, housing markets (Hong Kong, Singapore), commodity markets,bond markets (with talk of a bubble increasing in the United States, Germany,the United Kingdom, and Japan), and credit markets (where spreads in some emergingmarkets, and on high-yield and high-grade corporate debt, are narrowingexcessively).
Although QE may be justified by weak economic and growthfundamentals, keeping rates too low for too long can eventually feed suchbubbles. That is what happened in 2000-2006, when the US Federal Reserveaggressively cut the federal funds rate to 1% during the 2001 recession andsubsequent weak recovery and then kept rates down, thus fueling credit/housing/subprimebubbles.
Sixth, QE can create moral-hazard problems by weakeninggovernments’ incentive to pursue needed economic reforms. It may also delayneeded fiscal austerity if large deficits are monetized, and, by keeping ratestoo low, prevent the market from imposing discipline.
Seventh, exiting QE is tricky. If exit occurs too slowlyand too late, inflation and/or asset/credit bubbles could result. Also, if exitoccurs by selling the long-term assets purchased during QE, a sharp increase ininterest rates might choke off recovery, resulting in large financial lossesfor holders of long-term bonds. And, if the exit occurs via a rise in theinterest rate on excess reserves (to sterilize the effect of a base-money overhang on credit growth), the ensuing losses forcentral banks’ balance sheets could be significant.
Eighth, an extended period of negative real interest ratesimplies a redistribution of income and wealth from creditors and savers towarddebtors and borrowers. Of all the forms of adjustment that can lead todeleveraging (growth, savings, orderly debt restructuring, or taxation ofwealth), debt monetization (and eventually higher inflation) is the leastdemocratic, and it seriously damages savers and creditors, including pensionersand pension funds.
Ninth, QE and other unconventional monetary policies canhave serious unintended consequences. Eventually, excessive inflation mayerupt, or credit growth may slow, rather than accelerate, if banks – faced withvery low net interest-rate margins – decide that risk relative to reward isinsufficient.
Finally, there is a risk of losing sight of any road backto conventional monetary policies. Indeed, some countries are ditching theirinflation-targeting regime and moving into uncharted territory, where there maybe no anchor for price expectations. The US has moved from QE1 to QE2 and nowto QE3, which is potentially unlimited and linked to an unemployment target.Officials are now actively discussing the merit of negative policy rates. Andpolicymakers have moved to a risky credit-easing policy as QE’s effectivenesshas waned.
In short, policies are becoming more unconventional, not less, withlittle clarity about short-term effects, unintended consequences, and long-termimpacts. To be sure, QE and other unconventional monetary policies do haveimportant short-term benefits. But if such policies remain in place for toolong, their side effects could be severe – and the longer-term costs very high.

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关键词：questions question Quest tions Est particular necessary potential private credit

First, while a purely “Austrian” response (that is,austerity) to bursting asset and credit bubbles may lead to a depression, QEpolicies that postpone the necessary private- and public-sector deleveragingfor too long may create an army of zombies:zombie financial institutions, zombie households and firms, and, in the end,zombie governments.
Second, repeated QE may become ineffective over timeas the channels of transmission to real economic activity become clogged. The bond channeldoesn’t work when bond yields are already low; and the credit channel doesn’twork when banks hoardliquidity and velocity collapses. thestock-market channel leading to asset reflation following QE works only in the short runif growth fails to recover.
Third, the foreign-exchange channel of QE transmission– the currency weakening implied by monetary easing – is ineffective if severalmajor central banks pursue QE at the same time.
Fourth, QE in advanced economies leads to excessivecapital flows to emerging markets, which face a difficult policy challenge. Sterilizedforeign-exchange intervention keeps domestic interest rates high and feeds the inflows. But unsterilized interventionand/or reducing domestic interest rates creates excessive liquidity that canfeed domestic inflation and/or asset and credit bubbles.At the same time, forgoing intervention and allowing the currency toappreciate erodesexternal competitiveness, leading to dangerous external deficits. Yet imposingcapital controls on inflows is difficult and sometimes leaky.
Fifth, persistent QE can lead to asset bubbles bothwhere it is implemented and in countries where it spills over.Such bubbles can occur in equity markets, housingmarkets (Hong Kong, Singapore), commodity markets, bond markets (with talk of abubble increasing in the United States, Germany, the United Kingdom, andJapan), and credit markets (where spreads in some emerging markets, and on high-yield andhigh-grade corporate debt, are narrowing excessively).

Sixth, QE can create moral-hazard problems byweakening governments’ incentive to pursue needed economic reforms.
Seventh, exiting QE is tricky. If exit occurs tooslowly and too late, inflation and/or asset/credit bubbles could result.
Eighth, an extended period of negative real interest ratesimplies a redistribution of income and wealth from creditors and savers towarddebtors and borrowers.
Ninth, QE and other unconventional monetary policiescan have serious unintended consequences. Eventually, excessive inflation mayerupt, or credit growth may slow, rather than accelerate, if banks – faced withvery low net interest-rate margins – decide that risk relative to reward isinsufficient.
Finally, there is a risk of losing sight of any roadback to conventional monetary policies.