LONDON (MNI) – Quantitative easing has failed to tackle the weak
economic recovery and policymakers could up the scale of it, but caution
is inevitable when there are so many doubts about its impact, Bank of
England Monetary Policy Committee Member David Miles says.

Miles has been an enthusiastic proponent of QE and in a co-authored
Royal Economic Society article he runs through the research on it and
says the evidence shows it does work. Nevertheless, he highlights some
of its limitations and the doubts surrounding it.

The latest MPC minutes showed that some of Miles’ colleagues were
skeptical about how effective further QE would be at the present time in
boosting the real economy and the debate over its costs and benefits is
still very much alive.

“The very fact that the recovery in the Western economies remains
so sluggish and weak suggests that either recessionary forces have been
extremely strong; that Quantitative Easing does not work; that it has
not been done in sufficient scale or that its effects are limited and
need to be supplemented with other measures,” Miles writes.

He says the consensus in the academic literature is that QE does
work as it lowers yields and longer term interest rates, which bolster
the economy.

“This presumably is why central banks are still contemplating
further stages of quantitative easing,” he says.

It has helped mitigate the effects of the financial crisis but has
not been able to create a strong recovery, he says.

“This raises the possibility of increasing the scale of QE so that
it can have a larger macroeconomic effect, but we do not have much
evidence on whether QE faces diminishing returns,” Miles says.

The lack of extensive historical data on the impact of QE fuels the
uncertainty and “means policymakers inevitably have to behave
cautiously.”

In the same RES journal, BOE economists reprise their research on
QE and do find evidence that the BOE reverse gilt auctions had less
impact beyond the first wave.

Part of this may be due to market participants becoming more
familiar with the likely impact of each auction, allowing them to price
it in, whereas in the early stages of QE there was greater uncertainty
and price discovery took place.

“We found there was evidence that the importance of the overall
effects of the auctions on gilt yields diminished over time, as
liquidity and market functioning improved and markets learned about the
operation of the Bank’s purchase programme,” BOE economists Michael
Joyce and Matthew Tong write.

The BOE economists’ research, however, looks only at the early days
of QE. It finds there was a marked impact on auction days on yields in
the March-July 2009 period but this impact faded to close to zero in the
period from August that year through to January 2010.

Nevertheless, the BOE analysis suggests the impact of the gilt
auctions is only a small part of the overall impact of QE, with
portfolio effects, which boost other assets and drive down effective
rates, having greater significance. So even if the reverse auction
effects have become negligible, QE can still work.

The idea of increasing the amount of QE if it does turn out to have
a diminishing impact is certainly a contentious one on the MPC.

“One of the statements I dislike the most of all is when sometimes
people say ‘Well, if it’s having less effect then you just double or
triple the dosage’,” BOE Chief Economist Spencer Dale said in an
interview with the Times published Monday.

“To my mind that doesn’t seem to make any sense once you take
account of the fact that there are potential costs and risks associated
with an instrument,” Dale added.

The articles by Miles and the BOE economists appear in a special
edition of the RES’ Economic Journal on unconventional monetary policy.

-London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$$BE$]