In "QE and the bank lending channel in the United Kingdom", BoE economists Nick Butt, Rohan Churm, Michael McMahon, Arpad Morotz and Jochen Schanz tackle the popular creditist view that movements in lending drive overall activity, and that quantitative easing works by stimulating lending, and find "no evidence to suggest that quantitative easing (QE) operated via a traditional bank lending channel". Instead, their evidence is consistent with the monetarist view, that "QE boosted aggregate demand and inflation via portfolio rebalancing channels." They find this result by looking at the difference between banks that dealt directly with the Bank of England when it was buying gilts (UK government bonds) with new money in its QE programme. If the creditist view held, these banks would be more able to expand their lending with the extra deposits created when the BoE hands over new money for gilts.
Our first approach exploits the fact that, for historical and infrastructural reasons, it is likely that not all banks are equally well placed to receive very large OFC (other financial corporation) deposits. We use historical data on the share of banks’ OFC funding (relative to their balance sheet) to identify a group of banks that are most likely to have received deposits created by QE, which we call ‘OFC funders’. We use this variable, along with variation in banks’ OFC deposit funding to test whether there was a bank lending channel by comparing the lending response of such OFC funders to that of other banks during the QE period.
They check their result by looking at gilt sales that commercial banks had no control over, since they were obliged to carry them out on the behalf of their clients. This makes them random with respect to those banks' separate funding and lending decisions, and isolates the effect of extra deposits created by QE on those banks' credit activity.
Our second approach makes use of the fact that while most gilt purchases were from OFCs, these had to be settled via banks who were market makers in gilts. As these gilt sales were likely to be unrelated to banks’ lending decisions, we can use data on gilt sales to remove the endogenous variation in banks’ OFC deposit holdings and so test for a bank lending channel using an instrumental variables approach that controls for the interrelatedness of the bank’s decision.
This paper only adds to a welter of recent studies supporting the monetarist perspective on the macroeconomy. "Institutional investor portfolio allocation, quantitative easing and the global financial crisis", another BoE paper released earlier this month found, like Butt et al., that pension funds and insurers rebalanced their portfolios in response to QE, moving away from gilts and into corporate bonds relative to what they would have done without the programme.
If firms rebalance their portfolios to reflect their preferences, then relative prices would not appear to be 'distorted' by the programme, and markets would still be performing their chief function—aggregating information so everyone can economise effectively and create wealth.
Another BoE paper, from April, "What are the macroeconomic effects of asset purchases?" found that:
Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom).
Finally, another new paper tells us that even the good old quantity theory of money is pretty good at forecasting post-war US inflation. Looks like everything's coming up monetarist!