| Yes. I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper). Here are the 5 channels: 1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound) 2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn 3. A wealth effect that increases consumption brought about by higher bond and equity prices 4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation) 5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market? |
Ok. My guess is that QE goes directly to banks. Banks should start lending. QE is inflationary so the economy artificially grows and exports are helped cuz the $ gets cheaper but imports are hurt. This is not so bad for the $ because it is the world's reserve currency and a lot of commodities are traded in it.
Anyway, for some reason, the institutions don't lend the QE money into the real economy they buy portfolios of stocks because the return is greater and the risk is lower. That's my guess. I suppose for proper bonus points I need to be able to say why the stock market seems like a better bet than the real economy. And maybe #3 hasn't panned out because companies aren't paying dividends like they ought to.
crosses fingers