Is Qe Contractionary?

I ran across a fascinating blog post service yesteryear Peter Stella at Vox-Eu on conk strategies too QE. 

Peter points out that exclusively banks tin flame gibe reserves, piece anyone tin flame gibe curt term Treasuries. And y'all tin flame easily work Treasuries for collateral.  That way that curt term Treasuries are inwards unopen to feel to a greater extent than liquid than reserves, too that yesteryear buying huge amounts of Treasuries too issuing reserves, the Fed may endure genuinely contracting. 


In Peter's words:

Large Scale Asset Purchases (LSAPs) guide keep inadvertently caused a important alter inwards the composition of assets available inwards the opened upwards market.

• The stock of marketable, highly liquid, AA+ collateral savage yesteryear trillions (disappearing into the Fed’s portfolio, i.e. System Open Market Account).
• The stock of assets available exclusively for interbank merchandise (bank reserve deposits at the Fed) rose yesteryear trillions.

..Treasuries too Fed deposits are every bit safe. But they differ significantly inwards their marketability. Anyone tin flame merchandise Treasury securities; exclusively banks tin flame telephone commutation Fed deposits. ... 

• Banking too coin creation has non worked for at to the lowest degree 2 decades inwards the mode that almost people learned inwards school.

The former arrangement was rather unproblematic inwards the textbooks. The basic assumptions were (i) all credit was provided yesteryear banks; (ii) all banking concern credit (assets) were funded yesteryear the issuance, or creation, of depository liabilities (money) bailiwick to a reserve requirement; too (iii) cardinal banks controlled credit/money/inflation yesteryear rationing banking concern reserves. H5N1 stable 'money multiplier' was hypothesised to allow cardinal banks to accurately predict the eventual touching on of changes inwards banking concern reserves on coin too credit. 

The job with the former theory of monetary operations is that none of the 3 assumptions has been truthful for at to the lowest degree a generation. 

Most credit inwards the U.S.A. is created yesteryear nonbanks; virtually all banking concern lending is funded yesteryear the creation of liabilities that are non bailiwick to reserve requirements,3 too cardinal banks create non ration reserves. In fact they accept swell pains to supply banks with the amount of reserves they desire. Central banks influence credit non yesteryear rationing the quantity of reserves but yesteryear altering the involvement charge per unit of measurement that banks must pay to obtain the quantity of reserves they desire.

• Today, credit creation inwards full general too coin creation inwards item are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).

Today, banking concern deposits at the Fed guide keep exclusively 1 existent purpose – to facilitate management of the payments system. They are used to settle transactions with banks. Thus:

• The former notion that the quantity of banking concern reserves constrains lending inwards a fiat coin basis is completely erroneous.
• Traditional monetary policy has virtually nix to create with money.4

....Plainly the stock of reserves is no longer connected to credit or meaningful measures of “money” via the old-notion of a reserve-ratio-based coin multiplier. 

I don't purchase it all, too I retrieve unopen to of the magic properties of treasuries as collateral too coin are a chip overstated. But I'm collecting interesting stories yesteryear which it mightiness endure the instance that electrical flow monetary policy has the contrary of the intended sign or other unexpected effects.  Peter sure enough offers an interesting example.

He likewise points out that merely raising involvement paid on vast reserves may guide keep dissimilar effects than conventional policy which rations reserves. At a minimum he corrects my frequent assertion that reserves too Treasuries are perfect substitutes. No, Treasuries mightiness endure more "liquid''!

(Thanks to Thorvald Moe for pointing me to this interesting post.)