Naslov
Quantitative Easing, Stock Exchange, Inflation and Monetary Paradigm in the US: Lessons for Emerging Economies
(Quantitative Easing, Stock Exchange,Inflation and Monetary Paradigm in the US: Lessons for Emerging Economies)

Autori
Škare, Marinko ; Sinković, Dean

Vrsta, podvrsta i kategorija rada
Poglavlja u knjigama, znanstveni

Knjiga
Macroeconomic Responses to the COVID-19 Pandemic: Policies from Southeast Europe

Urednik/ci
Vidaković, Neven ; Lovrinović, Ivan

Izdavač
Palgrave Macmillan

Grad
Cham

Godina
2021

Raspon stranica
157-187

ISBN
978-3-030-75443-3

Ključne riječi
Monetary policy, Quantitative Easing, Stock Market, Inflation, Asset Prices

Sažetak
Introduction of quantitative easing (QE) during the Great Recession was supposed to be a temporary one-time policy tool to achieve needed financial stability. However, this nonconventional policy has become a permanent tool for each major central bank around the globe. Going into the 2008 crisis, US and UK banks were extremely leveraged, with very low bank reserves so the bailout was done via QE and various forms of government relief programs. Due to historical lessons of money printing, many economists were expecting the spike in consumer inflation. Yet it ended up being a top-down, anti-deflationary bank industry bailout and not a bottom-up, pro-inflationary real economy bailout. Several phases of QE only boosted banks’ liquidity and very little of those funds went to the real economy. Monetary inflation or growth of broad money supply via QE didn’t result in more money chasing fewer goods and services, and therefore wasn’t particularly inflationary for every price since the transmission mechanism from QE to the real economy was small. A simple look at the collapse of the velocity of money clearly explains that transmission was aimed toward some other forms of assets. It actually resulted in the inflation of financial assets such as stocks and bonds as well as housing. This paper shows that the nonconventional policy of quantitative easing has a strong and significant impact on the increase of the prices of the financial assets. Furthermore, unlike for the Great Recession, the policy response to the COVID-19 pandemic was somehow different since the massive monetary and fiscal stimulus was directed toward households and corporations, therefore reaching realms of the real economy. Rapid expansions of central banks’ balance sheets (QE) and government deficits were to great extent being utilized through helicopter money tools. This combination of fiscal spending via monetary financing and central banks’ corporate purchase programs could very well be inflationary since the transmission mechanism from QE to the real economy is high. Furthermore, implementation of such policies in the long-run implies a possible monetary paradigm shift since central banks will be able to increase the money supply to almost any extent independently of the private banks. In that sense, monetary inflation and transmission mechanism might not rely on the expansion of credit via the private banking industry. This paper is related to growing literature that investigates the impact of monetary policy on financial markets (see Bernanke 2020 for review). Many researchers have proved the positive effect of interest rate cuts and expansionary monetary policy on stock returns (Bernanke and Kuttner 2005 ; Cieslak et al. 2019 ; Brusa et al. 2020). Authors who examined the impact of QE on financial markets mostly focused on the effects on fixed income assets such as Treasury bonds market (Gagnon et al. 2011 ; Vissing-Jorgensen and Krishnamurthy 2011) or corporate bond market (Guo et al. 2020). Positive effects of Bank of Japan’s large-scale purchase of ETFs on the Japanese stock prices were found in the work of Barbon and Gianinazzi (2019). Similarly to our findings, Putnins (2020) showed that Fed actions taken during the COVID-19 crisis had a substantial positive effect on the stock markets. In this paper, we show how the Fed’s unconventional monetary policy via series of QE has a significant positive effect on the stock market performance since its introduction in 2008. Ultimately this confirms that Fed, for some particular reason, front runs the stock recovery and by such manipulation creates another stock market bubble. By rigging the market Fed eliminates the price discovery mechanism and destroys the free market. The notion—do not fight the Fed seems to be a justified strategy for investors. The question is, once when high inflation finally arrives and central banks around the world had to reverse their policies, who will be responsible when the bubble bursts and people losing a large portion of their investments and pensions?

Izvorni jezik
Engleski

Znanstvena područja
Ekonomija

POVEZANOST RADA