Consumption Demand and Wealth Effects of Unorthodox Monetary Policy

14 Pages Posted: 19 Jul 2013

See all articles by Georg Erber

Georg Erber

European Productivity Research Center (EPRC)

Date Written: July 17, 2013


Unorthodox monetary policy invented by Ben Bernanke to stimulate the real economy towards a higher growth and employment path uses huge amounts of money to buy up assets on the capital market in particular government bonds and mortgage backed securities. This kind of monetary action was named by Bernanke QE, i.e. quantitative easing. The channel through which QE should operate is on the one hand the lowering of the yield curve to ease credit financing and refinancing in particular and on the other hand through the wealth effect on consumption demand. The latter should stimulate aggregate consumption through the well known real-balance effect first introduced into the Keynesian consumption function by Don Patinkin. However, there seems empirical evidence that both channels are not working as expected. After three QE periods, in particular the last QE did not lower the yield curve anymore. Additionally the wealth effect on aggregate consumption seems as well non-existent. There is no visible positive effect observable that QE has led to a higher economic growth or accelerated the decline of the unemployment rate. However, it creates a legacy of about 2.5 trillion US-Dollar of additional liquidity over the three rounds of QE. This poses a major dilemma for an exit from QE. If inflation expectations are rising and triggering higher inflation without having accomplished a higher sustainable growth and employment path of the economy, the central bank face the dilemma of fighting inflation and face huge losses on its balance sheet from those assets bought over the QE period or hedging their balance sheet and let inflation accelerate beyond its previous target. A soft landing of an exit from QE becomes highly improbable because the market reactions will tend to overshoot as soon as the central banks begin to commit towards a QE exit policy. Contrary to Milton Friedman’s recommendation for a steady monetary policy oriented towards a long-term real growth trajectory, the activist policy of QE creates endogenous boom and bust cycles.

Note: Downloadable document is in German.

Keywords: Monetary Policy, QE, Consumption, Wealth Effects

JEL Classification: E21, E31, E32, E52

Suggested Citation

Erber, Georg, Consumption Demand and Wealth Effects of Unorthodox Monetary Policy (July 17, 2013). Available at SSRN: or

Georg Erber (Contact Author)

European Productivity Research Center (EPRC) ( email )

No Address Available

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