Most folks who identify as market monetarists have been in favor of the Fed’s bond-buying, or “quantitative easing,” program. They don’t think it’s been executed perfectly, however. If the Fed’s actions had been accompanied by a stated intention to target the level of nominal GDP, there’s a strong case that QE could have been far smaller yet far more effective. Still, as I write in my new National Review column, QE has likely helped the economy and thus been worth doing.
Question #1 on Monday: “QE is doing nothing since banks are just sitting on the money. Look at the huge increase in excess reserves! What’s the point? How is this boosting growth, exactly?”
Question #2 on Tuesday: “Maybe the Fed is having a positive economic impact, but isn’t it just a sugar high, papering over or propping up a bad economy with easy money?”
Here is #3:
Why hasn’t QE been inflationary?
Scott Sumner, economist at Bentley University and blogger at The Money Illusion:
It hasn’t been inflationary because demand has been rising very slowly (NGDP). In addition, the economy is currently depressed so when demand does rise it mostly leads to more real GDP. The reason demand has not risen faster is that with interest rates low, and the Fed paying interest on reserves (big mistake) banks have more incentive to sit on the extra reserves..
Michael Darda, chief economist at MKM Partners:
The Fed has boosted the supply of [the monetary base] dramatically but there’s a very high demand for base when rates are low or expectations of future growth and inflation are subdued.
David Beckworth, economist at Western Kentucky University and blogger at Macro and Other Market Musings:
Because liquidity or money demand remains so elevated. The Fed could quadruple the size of its balance sheet and have no effect on inflation if money demand quadrupled.
Josh Hendrickson, economist at the University of Mississippi and blogger at The Everyday Economist:
First, I would argue that QE has been inflationary to some extent as it has caused inflation to rise back to the Fed’s target from where it was during 2008. Second, if people like Scott, David, and I are correct that there is an excess demand for money problem, then a successful QE policy shouldn’t cause inflation. Inflation is caused by an excess supply of money. If there is an increase in the demand for money and the Federal Reserve does nothing, we should expect disinflation if not deflation. On the other hand, if the Fed was to increase the money supply in conjunction with the increase in money demand, then inflation should remain relatively constant.