QE2 retropspective

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Jim Hamilton’s take on QE event studies is the best I have read. He deals well with the puzzle of correlation, and problem of identification.

I think what is more important, however, is Jim’s assessment that QE works (a bit). Bernanke put more QE back on the table last night. The road block to doing more now is the presently elevated rate of inflation – however if that starts to slow once again, and growth does not pick up substantially, i expect more QE.

My long standing prediction that the Fed’s first hike would be in 2014 is looking at risk of being too optimistic. Indeed, it is easier to see the Fed going the bank of England’s way and allowing inflation to pick up substantially – once the recovery actually gets some traction!


  1. Haven’t read the post (Instapaper’d it), but I think if the Fed wanted to reinflate the economy, they could. QE2 was piss in a lake. Of course, there are structural issues with US economy, but is this QE1/2 all the Fed can throw at this? Um, no. Can it do more? Yes: http://goo.gl/r53gF

  2. Actually I noticed I have read it. Some thoughts:
    1/ Hamilton implicitly accepts EMH: the market will rightly signal the effects of policy actions. However, it becomes problematic to untangle cause and effect.
    2/ This signalling problem would be largely solved by the Fed setting up and supporting an NGDP futures market. Signals would become a bit clearer then.
    3/ If you accept EMH + need for NGDP futures market for signally, then you would probably get something like a policy of targetting expected NGDP (levels).

    Regarding the conflicting signals between oil & yields, it might be more interesting to check TIPS yields and broad based commodities index that tracks global AD a bit better. Oil is too strongly subject to the vagaries of the cartel producers, although it could be helpful first approx. I would be interested to see what OPEC announcements/shenanigans were occuring over periods considered.

    An alternative to understanding conflicting signals between 10yrs and oil is perhaps the 10 yr was saying, “yes this will do something”, but oil was saying, “it’s not doing enough!”.

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