Only the earliest asset purchase programs launched by central banks post-2008 had positive macroeconomic effects, while subsequent ones had virtually none and were mainly beneficial to asset prices, according to economists at the Bank for International Settlements.
Since the financial crisis, the balance sheets of the world's 'big four' central banks — the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan — have swelled to over $14 trillion as they have tried to keep credit flowing to the real economy and boost inflation.
But in a Bank for International Settlements working paper examining the effects of multiple rounds of quantitative easing by the Fed and BoE in the last decade, authors Henning Hesse, Boris Hofmann and James Weber concluded that only the earliest programs had a positive macroeconomic impact.
"The reduced effectiveness seems to reflect in part better anticipation of asset purchase programs over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve’s last asset purchase program," they wrote. "In all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices."
The Fed began its first round of QE in November 2008, but ramped up its intervention with 'QE2' two years later before launching a third round in September 2012. In that time, the S&P 500 has more than tripled in value and hit a record closing high just shy of 2,700 this month.
Hesse and his colleagues acknowledged the "widespread agreement that the stimulus provided by these measures was crucial in halting the crisis and preventing a deeper, more protracted recession," but said their analysis clearly showed a weakening of the macroeconomic effects of 'asset purchase announcement shocks' over time.
"We find significant positive effects on real GDP and [inflation] for the first subsample period," they wrote. "In the second period, the estimated effects are smaller and often not significantly different from zero."
In particular, the effect of subsequent QE announcements on real GDP were insignificant in both the U.S. and U.K., and while inflation still responds in a "marginally positive" way, the impact on asset markets is much more persistent, said the authors.
"The bond market impact is in both periods very similar in the United States, while it is somewhat stronger and more persistent in the United Kingdom in the second period," they wrote. "The stock market impact has become quantitatively weaker in both countries, with peak impacts falling from 2.4% to 1.2% in the United States and from 3.5% to 2.4% in the U.K. That said, also in the second period the effects of the shock on stock prices are highly persistent and significantly different from zero."
