Without the asset purchases undertaken between March 2009 and January 2010 in the first phase of the Bank of England''s ''quantitative easing'' (QE) policy, real GDP would have fallen even more during 2009 and inflation would have reached low or even negative levels. That is one of the conclusions of a study by a Bank research team, published in the November 2012 issue of the Economic Journal.

On the more conservative estimates favoured by the authors, QE seems to have had a peak effect on the level of real GDP of around 1.5% and a peak effect on annual CPI inflation (consumer price index) of about 1.25 percentage points. But since the magnitude of the effects varies considerably across the different specifications used in the analysis, the authors stress that their estimates are subject to considerable uncertainty.

The Bank''s asset purchases were expected to affect the real economy in a number of ways, but a key one was through what is known as the ''portfolio balance'' channel. Through this channel, asset purchases push up the price of the assets being purchased, as well as the price of other assets that are closer substitutes for the purchased asset than money. This in turn stimulates demand through lower borrowing costs and increased wealth.

Previous Bank research examining the financial market impact of large-scale asset purchases suggested that it had a significant effect on medium and long-term government bond (or gilt) yields. The new study uses these estimates as the basis for estimating QE''s effects on output and inflation.

Analysing these wider effects is not an easy task because it calls for a counterfactual analysis of what would have happened to real GDP and CPI inflation if the QE policy had not been implemented. To get their estimates, the authors therefore first need a model relating government bond yields to other macroeconomic and financial data.

To construct this ''no policy'' counterfactual, the authors assume that the macroeconomic effects of QE come solely through their impact on government bond yields. This counterfactual is then compared with a baseline prediction that includes QE. The difference between the two scenarios is taken as a measure of the macroeconomic impact.

To ensure that their findings are robust, the authors use a multiple models approach and construct conditional forecasts (for real GDP and CPI inflation) from three different empirical models. These models are all variants of a class of model known as a vector autoregression (VAR).


In general, VARs are systems of equations that include lagged values of all the variables examined, which makes it possible to account for the complicated inter-relationships in the data. The models vary in the amount of economic structure they impose and the weight they give to the data, but all of them allow for the estimated relationships to change over time.

 ''Assessing the Economy-wide Effects of Quantitative Easing'' by George Kapetanios, Haroon Mumtaz, Ibrahim Stevens and Konstantinos Theodoridis is published in the November 2012 issue of the Economic Journal.

This research was presented at the Bank of England conference ''QE and other unconventional monetary policies'', held in November 2011. Along with other work, this research fed into ''The United Kingdom''s quantitative easing policy: design, operation and impact'', an article published in the Bank of England Quarterly Bulletin, 2011 Q3.