Thursday, 5 September 2013

Can quantitative easing lift economic growth?

By Dr Frank Shostak

Some commentators such as Mohamed El-Erian, the chief executive officer of Pacific Investment Management (PIMCO), are of the view that the Federal Reserve’s policy of massive asset purchases has added very little to economic growth. A study published by the Federal Reserve Bank of Kansas City (Arvind Krishnamurthy and Annette Vissing-Jorgensen, August 9, 2013) explores various channels through which monetary pumping can grow the US economy. On this the study indicates that the Fed’s purchases of mortgage backed securities (MBS) can have a strong beneficial effect. The study however suggests that with respect to the purchases of Treasury Bonds the effect on the economy is minimal.
Now, as a result of the Fed’s quantitative easing (QE) the long term mortgage interest rate fell from 6.32% in June 2008 to 3.35% by November 2012. Consequently, the growth momentum of the housing market has had a strong response to this fall in rates with the yearly rate of growth of housing starts jumping from minus 55% in January 2009 to 42% by March 2013. The yearly rate of growth of new home sales climbed from minus 46.4% in January 2009 to 35.5% by January 2013.

Read the full article here.

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