The politics of QE research

Confirmation bias?

How effective is QE? Fabo and al. argue that the answer to this question differs depending on whether the research is from academia or central banks. The authors surveyed heads of research at the world’s leading central banks and looked at all articles, published and unpublished, that analyze the policy effects for at least one of three economies: the United States, the United Kingdom, and the euro area. They find that central bank papers report systematically larger effects of QE on both output and inflation. In particular, while all of the central bank papers report a statistically significant QE effect on output, only half of the academic papers do. Central bank papers are more likely to not disclose the width of the confidence interval, and also to use dynamic stochastic general equilibrium (DSGE) models rather than vector autoregression (VAR) models in their estimation. What is more, central bankers who report larger QE effects on output experience more favorable career outcomes.

Figure 2. Number of Authors by Employer and PhD Institution

Figure 6: The Effect on Inflation by Central Bank Affiliation. The figure plots histograms for the estimated effect on inflation, separately for papers with and without CB affiliated authors.

Fifty Shades of QE: Conflicts of Interest in Economic Research
Authors: Brian Fabo, Martina Jančoková, Elisabeth Kempf, Luboš Pástor
From: National Bank of Slovakia, European Central Bank, University of Chicago, NBER, CEPR

Throwing another wrench to the mix!

If there is ambivalence over QE that lends to financial firms (Wall Street QE), what about QE that lends to non-financial firms (Main Street QE) and represents an important departure from past Fed policies? This Sims and Wu paper develops a new framework to compare and contrast these different policies. They find that in a situation in which financial intermediary balance sheets are impaired, such as the Great Recession, Main Street and Wall Street QE are perfect substitutes and both stimulate aggregate demand. In contrast, for situations like the one we are now facing due to COVID-19, where the production sector is facing significant cash flow shortages, Wall Street QE becomes almost completely ineffective, whereas Main Street QE can be highly stimulative. Does that imply that the Fed will assume credit risk and pick “winners and loosers”?
Wall Street vs. Main Street QE
Authors: Eric R. Sims, Jing Cynthia Wu
From: University of Michigan at Ann Arbor, University of Notre Dame