Quantitative Easing is not Neutral

The recent statements by Eugene Fama, Nobel Laureate in Economics (by the way, the actual title is Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel), on the fact that Quantitative Easing is neutral have puzzled many. According to him, “QE doesn’t do much”. When analyzed from the perspective of current debates in macroeconomics, this view is rather hard to be categorized, since no serious approach I know of really thinks about QE in these terms.

Take for example Keynesians like Krugman who thinks that the issue with QE is rather not being strong enough. In his words, more quantitative easing is needed, although it might lead to higher inflation. This is hardly a view that quantitative easing is neutral. Similarly, Brad Delong completely dismisses Fama’s view, simply suggesting that Fama completely misunderstands the current issues in financial markets (which sound pretty ironic).

On the other side of the debate, neither Cochrane (also from University of Chicago) thinks that QE is neutral. Surely, he contradicts the usual views on QE (stimulative vs inflationary). But he also views the idea of US having a lot of short term debt as risky, since it would make it “vulnerable to bad news”.

Of course, we should not ignore the inflationary views on Quantitative Easing. Such is the example of Martin Feldstein. Although he admits that up to now, inflation remained low despite the massive bond purchases, he sees the inflation as a real danger in the longer run, as the economy will eventually recover.


Also read:

Macroeconomics Wikipedia: Quantitative Easing

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