Unconventional Monetary Policies and the Macroeconomy: The Impact of the United Kingdom's QE2 and Funding for Lending Scheme

33 Pages Posted: 16 Aug 2015

See all articles by Rohan Churm

Rohan Churm

Bank of England - Monetary Analysis

Michael Joyce

Bank of England - Monetary Analysis

George Kapetanios

King's College, London

Konstantinos Theodoridis

Cardiff University

Date Written: August 14, 2015

Abstract

In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional quantitative easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank’s QE purchases during 2011-12 and the initial phase of the FLS each boosted GDP in the United Kingdom by around 0.5%-0.8%. Their effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.

Keywords: Bayesian methods, large-scale asset purchases, quantitative easing, Funding for Lending Scheme, vector autoregressions, auto-regressive distributed lag

JEL Classification: C11, C32, E52, E58

Suggested Citation

Churm, Rohan and Joyce, Michael and Kapetanios, George and Theodoridis, Konstantinos, Unconventional Monetary Policies and the Macroeconomy: The Impact of the United Kingdom's QE2 and Funding for Lending Scheme (August 14, 2015). Bank of England Working Paper No. 542, Available at SSRN: https://ssrn.com/abstract=2644312 or http://dx.doi.org/10.2139/ssrn.2644312

Rohan Churm (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Michael Joyce

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
44 (0)207 601 4444 (Phone)

HOME PAGE: http://www.bankofengland.co.uk

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Konstantinos Theodoridis

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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