Research & Projects

Project 1

Quantitative Easing: a unified model of the signalling and portfolio balance channels

Abstract

Research into Quantitative Easing (QE) has centred on the “portfolio balance” and “bank lending” channels, which both assume the existence of financial frictions and that QE operates by manipulating these frictions to deliver real economic effects. An alternative “signalling” mechanism for QE assumes instead that QE has no direct effect on the economy, but instead operates akin to forward guidance. This paper proposes a novel method for modelling the signalling channel, and integrates this with a stylised portfolio balance model. It then proceeds to identify the relative contribution of the signalling and portfolio balance channels using “impulse response matching” with UK data. We find as a central estimate that the signalling channel was responsible for 44% of the GDP response to QE in the UK, with a wide 90% confidence interval of 10-100%. This suggests that the signalling channel is more important than prior work indicated. We briefly consider the impact of each channel on key macroeconomic aggregates, and demonstrate that while the utility impact of each channel is similar, the signalling channel has a more persistent impact on medium-term consumption and investment.

Project 2

Monetary Policy Consequences of Financial Stability Interventions: Assessing the UK Bond Market Crisis and the Central Bank Response

Abstract

We study the macroeconomic implications of non-bank financial institutions (NBFIs) in the context of the 2022 UK gilt crisis and estimate the monetary policy spillovers of financial stability interventions. We make three contributions. First, we develop the first DSGE model featuring liability driven investment (LDI) and pension funds. This novel framework in which LDI activity amplifies the movements in gilt prices allows us to replicate the UK gilt crisis, demonstrating a crucial mechanism through which NBFIs can amplify financial and economic distress. Second, we quantitatively estimate the monetary policy spillovers of the Bank of England financial stability asset purchases. We find that the asset purchases were successful in offsetting LDI-driven gilt market dysfunction. The temporary, targeted nature of these purchases was crucial in avoiding monetary spillovers. Third, we model two counterfactual instruments – an NBFI repo tool and a macroprudential liquidity buffer – and compare their effectiveness as well as monetary spillovers. Our results show that the central bank can successfully address NBFI-driven market stress without loosening monetary policy, avoiding potential tensions between price and financial stability.

Project 3

Large-scale Asset Purchases Have Strong Distributional Effects: an Overlapping Generations Model of Quantitative Easing

Abstract

We incorporate a stylised portfolio balance model of Quantitative Easing (QE) into a New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model featuring Overlapping Generations (OLG). In OLG models wealth varies across the life cycle as agents save for retirement. QE inflates asset values, creating heterogenous wealth effects which favour older agents with more savings. Conversely insofar as QE suceeds in stimulating demand, there are positive wage and labour effects which benefit working-age agents. We conduct simulations of Quantitative Easing enacted by a central bank following a severe demand shock which has pushed nominal interest rates to their effective lower bound (ELB). We find that QE at the ELB is utility-increasing for all ages and cohorts, but the gains are not evenly distributed. The vast majority of the utility gains accrue to a narrow group aged 60-64, who benefit from both the wage and wealth effects.

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