QE and ultra-low interest rates: Distributional effects and risks
I recently finished reading this paper about quantitative easing's distributional effects. The paper contains a lot of potentially interesting data, but suffers from a handful of weaknesses.
The interesting stuff: The paper pretty clearly demonstrates that the main beneficiaries of ultra-low interest rates are governments, though corporations also gain significantly. Effects on households are mixed - generally, young households with more debt benefit while older households with more savings are hurt. They find that the effects on stock and bond values are more muted than one might think.
The paper suffers really from one big weakness: it focuses only on interest income and, to a lesser extent, financial asset valuation effects from low interest rates. It totally ignores any Cantillon effects that lead to relative price differences, which could be attributed to monetary injections. Just to give an example of where Cantillon effects may have mattered, we can look at a disaggregation of the Consumer Price Index into product categories. This will give us a good idea of which prices are rising quickly, while others are rising slowly.
A quick look suggests that the following broad categories have seen very rapid increases in prices since the beginning of the first round of Quantitative easing (beginning in November 2008) (>30% over that time): Motor fuel, energy commodities, tobacco and smoking products, fuel oil and other fuels, hospital and related services, and educational books and supplies. Meanwhile, a handful of categories have seen decreases in their relative prices of over 10% in that time: information technology, window and floor coverings and other linens, other recreational goods, other household equipment and furnishings.
How much of these relative differences can be chalked up to QE? That's hard to say - but it is clear that not all industries are gaining equally, and ignoring relative price changes means we miss part of the story.
The interesting stuff: The paper pretty clearly demonstrates that the main beneficiaries of ultra-low interest rates are governments, though corporations also gain significantly. Effects on households are mixed - generally, young households with more debt benefit while older households with more savings are hurt. They find that the effects on stock and bond values are more muted than one might think.
The paper suffers really from one big weakness: it focuses only on interest income and, to a lesser extent, financial asset valuation effects from low interest rates. It totally ignores any Cantillon effects that lead to relative price differences, which could be attributed to monetary injections. Just to give an example of where Cantillon effects may have mattered, we can look at a disaggregation of the Consumer Price Index into product categories. This will give us a good idea of which prices are rising quickly, while others are rising slowly.
A quick look suggests that the following broad categories have seen very rapid increases in prices since the beginning of the first round of Quantitative easing (beginning in November 2008) (>30% over that time): Motor fuel, energy commodities, tobacco and smoking products, fuel oil and other fuels, hospital and related services, and educational books and supplies. Meanwhile, a handful of categories have seen decreases in their relative prices of over 10% in that time: information technology, window and floor coverings and other linens, other recreational goods, other household equipment and furnishings.
How much of these relative differences can be chalked up to QE? That's hard to say - but it is clear that not all industries are gaining equally, and ignoring relative price changes means we miss part of the story.