Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK

48 Pages Posted: 14 Sep 2016 Last revised: 23 Feb 2018

Mirco Balatti

Henley Business School - ICMA Centre; European Central Bank (ECB)

Chris Brooks

University of Reading - ICMA Centre

Michael P. Clements

University of Reading - Henley Business School

Konstantina Kappou

University of Reading - ICMA Centre

Date Written: September 13, 2016

Abstract

This paper considers the impact of US and UK Quantitative Easing (QE) on their respective economies with a particular focus on the stock market, production and price levels. We conduct an empirical quantitative exercise based on a novel six-variable VAR model, which combines macroeconomic and forward-looking financial variables and uses a 'pure' measure of QE. The results suggest a positive response of equity prices, and a 'V' shaped reaction of volatility and the bid-ask spread to the monetary stimulus. Output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank's programmes. We attribute the variation to this difference in our modelling approach, which includes stock market variables, and we conclude that its presence is of critical importance in the assessment of unconventional monetary policy. Economically, we argue that the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than real projects.

Keywords: Quantitative Easing, Monetary Policy, Stock Market, Vector Autoregression

JEL Classification: C32, C54, E51, E58, G1

Suggested Citation

Balatti, Mirco and Brooks, Chris and Clements, Michael P. and Kappou, Konstantina, Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK (September 13, 2016). Available at SSRN: https://ssrn.com/abstract=2838128 or http://dx.doi.org/10.2139/ssrn.2838128

Mirco Balatti (Contact Author)

Henley Business School - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA, RG6 6JE
United Kingdom

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Chris Brooks

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Michael P. Clements

University of Reading - Henley Business School ( email )

Whiteknights
Reading, RG6 6BA
United Kingdom

Konstantina Kappou

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 7793405682 (Phone)
+44 1189314741 (Fax)

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