Methods for investigating the political economy of quantitative easing (QE)

Dear Colleagues,

Unconventional monetary policies (UMP), such as quantitative easing (QE), were applied by central banks in several advanced industrial countries in response to serious economic and financial concerns arising from the global financial crisis of 2008. Central banks expanded and changed the composition of their balance sheets through QE. The rationale behind QE was to raise inflationary expectations, inducing people to borrow and spend to drive up domestic demand (by injecting funds into banks to finance domestic loans and refinance mortgages) without in the meantime undermining confidence in the future value of money or the sustainability of the public finances and debt. QE was supposed to be a short-term policy, and nobody knew at the time how this approach would work in practice.

A decade later, UMPs are still being pursued by some major central banks, notably the European Central Bank (ECB) and the Bank of Japan (BoJ). Resort to such policies over long periods has created unintended financial and political economy consequences.

The prolonged implementation of UMP has distorted risk perceptions, leading to a build-up of financial imbalances. These imbalances lead to resource misallocations with a long-lasting impact on productivity. Very low or negative interest rates weigh on the profitability of financial institutions, impairing the monetary transmission mechanism and making these institutions more vulnerable to future shocks, while delaying balance sheet repair. QE creates asset inflation which impedes creative destruction by setting a negative long-term real interest rate. Such rates support ‘zombie’ firms allowing them to survive even though they do not generate enough income to generate a positive return on capital. Another effect is the unreasonable leverage and prices observed in the real estate sector, with the credit risks which that entails for the future.

The political economy consequences are dear, as QE has impacted both housing costs and pensions. As noted by John Doukas^[1] instead of inducing spending to stimulate domestic demand, QE has led to less consumption, less investment and greater retirement uncertainty. QE drives the value of liabilities, for most private and public pensions, to rise more than the value of assets in which the funds are invested explaining the phenomenon of underfunded pensions in many countries by hurting baby boomers’ retirement incomes, QE has had the self-defeating effect of constraining economic recovery given that baby boomers attach greater importance to funding retirement than current spending to meet their future financial obligations. In addition, baby boomers being a wealthier class have lower spending needs than other individuals. This, then, induces them to invest more than consume, driving asset prices even higher.

By creating asset inflation, QE is penalizing the middle class, whose wages have declined while the savings they are making while working will generate less future income. Asset inflation has the potential to cause social disruption, and some signs are already there. The QE monetary disruption may have contributed to the protest votes reflected in Brexit in the UK, and the rise of radical parties in Germany, Italy and France. Research on the Brexit referendum has shown that anxiety about individual financial situations was a key predictor of intentions to vote ‘Leave’. The squeezed middle class is increasingly disenchanted with national political establishments and seeking instead a channel of protest and voice outside traditional political party frameworks.

Most researchers do seem to recognise, at some level, that UMP/QE had unintended financial consequences. Few, though, emphasise the political economy impact of QE. In consequence, little attention is anywhere given to elaborating analysis, methods and remedies for addressing the uncertainty and volatility created by QE. The intention here is to address this vacuum.

The proposed Special Issue is concerned with addressing this sort of question, by considering from various perspectives strategies and methods for analysing the unintended financial and political economy consequences of UMP.

The aim of this special issue is not to follow existing studies of the effectiveness of QE or to join belatedly the debate about whether central banks should have done things differently. The primary aim is both to initiate a better understanding of the unintended consequences of UMP and to encourage researchers to concern themselves with seeking to develop or elaborate methods and approaches that are relevant to that analysis. Possible inter-disciplinary fields include the history of thought, or the focus could be on ways forward.

Contributors may address issues such as the specific topics consistent with the theme listed below (these over-lapping possibilities are in no particular order and are thus by no means comprehensive and are merely indicative of):

1. Political economy approaches and methodologies, including new political economy; institutional economics; drivers of change/politics of development; sustainable livelihoods; and early warning models and conflict analysis.
2. Critical scrutiny of the typical counter-factual defence of QE—namely, that the loss of output and welfare losses from the 2008 global financial crisis would have been much more severe if QE had never been tried.

1. Indicators and conceptual issues involved in measuring economic and political unintended consequences of UMP/QE.
2. Bottom up, micro-level, game theory approach looking at individual interactions and individual incentives.
3. The role of demographic factors in the political economy impact of QE
4. Mechanisms whereby QE slows real wage and employment growth
5. The responsibilities of the central banks in politically volatile situations
6. Could the proceeds of QE be channelled to economic wealth creation and redistribution? Jean Michel Paul in his column for Bloomberg^[2] proposes that central bank assets generated by this program could be put into a fund for education and infrastructure. The interest earned on these assets could finance public investment, like research, education and retraining. If the proceeds of QE are invested in growth-expanding policies, the gain could help finance future pension entitlements, and officially-induced asset inflation could prove an investment, not simply a tax and an arbitrary regressive windfall for rentiers.

[1] https://eprints.lse.ac.uk/71168/1/blogs.lse.ac.uk-Unintended%20consequences%20of%20the%20ECBs%20quantitative%20easing%20programme%20could%20undermine%20Europes%20recovery.pdf

[2] https://www.bloomberg.com/view/articles/2017-08-22/the-unintended-consequences-of-quantitative-easing

Prof. Dr. Brigitte Granville
Guest Editor

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Economies is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1800 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

• Unconventional monetary policies (UMP)
• Quantitative easing (QE)