Category Archives: Monetary policy

Yields and inflation expectations

During the last couple of weeks, yields have been rising and stock markets falling. Standard market turbulence is not interesting for this blog – stocks go up and down, most of the time up, and yields fluctuate – but intriguing (and expected) patterns characterize recent events.

Everybody seems to agree what is going on markets these weeks: Vaccines are successful and being rolled out, so economies will open up soon, and Biden will get his stimulus package to the tune of USD1.9tn. These two things (an already strong economy when opening up and on top of that a large stimulus package) will lead to very strong growth during the second half of 2021. Inflation will rise and the Fed will have to tighten monetary policy. The expected rise in inflation and the policy rate leads to increases in yields today. This hurts stocks. These US developments spill over to other countries.

This story largely makes sense. Looking at the data, however, interesting outstanding issues remain.

The story

Inflation expectations have been on the rise since the start of the rally in April 2020. Figure 1 shows developments in expected average annual inflation in the US over the next five years and the yield on five-year Treasuries since April 1, 2020:

Figure 1. Yield on 5-year Treasuries and 5-year breakeven inflation rate. Daily data since April, 2020. Two percent inflation target indicated by dotted line.
Source: Fed St. Louis Database

From a low level, expected inflation rose strongly during the summer-2020 rebound in economic activity, i.e. from April until August, and then stabilized. Since the election of Biden in November, inflation expectations have been on the rise again, because of the expected arrival of vaccines and the stimulus package.

Today, early March 2021, financial markets expect US inflation to be 2.4% per year on average over the next five years. Early November, expected inflation was 1.6%. An increase of almost one percentage point over the course of four months.

An expected rate of inflation of 2.4% is above the Fed’s target rate of inflation of 2% (link). With its new policy, the Fed might allow inflation to exceed 2% for some time, following a period of low inflation, such that average inflation over time approaches 2% (link). But how much more than 2% inflation will the Fed allow before it reacts? At 2.4%, markets start speculating that the Fed will raise rates to keep inflation expectations anchored.

Yields on 5-year Treasuries (also shown in Figure 1) had not moved until a few weeks ago. This also makes sense. As long as inflation is below the Fed’s two percent inflation target and the economy is suffering from the corona-recession, nobody expects the Fed to raise rates. As inflation started exceeding the target, expectations of a Fed hike started to be priced in.

Yields on one- and two-year Treasuries have not started rising yet, whereas yields on Treasuries with a maturity exceeding five years (five-year, seven-year, ten-year, twenty-year, etc.) have increased markedly during recent weeks. This means that the Fed is expected to start raising the policy rate in a couple of years only.

The rise in yields has caused turbulence on stock markets. Volatility (standard deviation of daily changes in the Nasdaq index, for instance) was 1.1% during November and December 2020 but 1.4% during January and February 2021. The same goes for the SP500 (0.83% during the last two months of 2020 vs. 1.04% during the first two months of this year). Stocks suffer.


All this (yields rise when expected inflation exceeds the target of two percent) seems fine and makes sense. The complicating feature, however, is that ten-year yields (and twenty-year and thirty-year, i.e. yields on long-maturity securities) have been constantly rising in relation to shorter-term yields since markets calmed down in April 2020:

Figure 2. Yield on 10-year Treasuries minus yield on 5-Treasuries. Daily data since April, 2020.
Source: Fed St. Louis Database

In April 2020, 10-year yields were 25 basis points above 5-year yields. Today, they are 80 basis points above.

It is thus not a new thing that yields rise. Longer-term yields have been doing so for some time. The new thing is that other yields start to rise, and that the increase in longer-term yields has accelerated during recent weeks.

We have just argued that it makes sense that markets start speculating that the Fed will raise rates when inflation exceeds two percent, and yields consequently react. But expected inflation over the next ten (and five) years has been below 2% ever since the start of the corona crisis and up until the turn of the year. Nevertheless, yields on ten-year (and longer) securities have been rising since April.

It is instructive to split expected inflation over the next ten years into expected inflation over the next five years and the subsequent five years, i.e. years 1-5 and 6-10 (the latter is sometimes called “5-year, 5-year expected inflation” or “5y5y expected inflation”):

Figure 3. 5-year breakeven inflation rate, 10-year breakeven inflation rate, and 5-year,5-year forward inflation expectation. Daily data since April, 2020. Two percent inflation target indicated by dotted line.
Source: Fed St. Louis Database

Up until January 2021, expected inflation was generally below the 2% target rate of inflation. Shorter-term (1-5 years) expected inflation was lower than long-term expected inflation (6-10 years) but also rose faster. Still, ten-year yields rose while shorter-term yields did not.

Expected inflation over the next ten years is the average of the 5 year and 5y5y expected inflation.

The complication, thus, is that while it is fine and makes perfect sense that market reacts when expected inflation exceeds 2%, it is somewhat puzzling that some yields (longer-term) react when inflation is below 2% while other do not (shorter-term), even when shorter-term inflation expectations rise faster that longer-term expectations?

(Of course, other things, such as the real rate and risk premiums, determined yields, and I briefly discuss these below, but given that there is so much focus on inflation expectations these days, we need to complete that story first).

This issue is a little bit that either you say:

“Given that expected inflation was below 2% until December 2020, it makes sense that shorter-term yields were flat until the start of this year. When expected inflation over the next 5 years started exceeding 2%, 5-year yields started increasing and longer-term yields accelerated”.

Or you say:

“I believe ten-year yields have increased since April because inflation expectations have been increasing, recognizing that expected inflation was below 2%”.

You might be able to come up with a story explaining developments before January, i.e. long-term yields rising but not short-term, and expected inflation below 2%, but it is not straightforward. One story could be that people expected the Fed to keep rates low over the next couple of years, but raise them later. This story would not be based on expected inflation, though, as expected inflation was below 2%, both on the short and the long run.

Before corona

By the way, before we continue, there actually was some relation between expected inflation and yields before the corona crisis, as there generally is. Between autumn 2018 and the corona crisis, expected inflation was falling by close to half a percentage point:

Figure 4. 5-year breakeven inflation rate and 5-year,5-year forward inflation expectation. Daily data since January, 2018. Two percent inflation target indicated by dotted line.
Source: Fed St. Louis Database

And yields were falling, too, during the same period:

Figure 5. Yield on 10-year Treasuries and yield on 5-year Treasuries. Daily data since January, 2018.
Source: Fed St. Louis Database

Real yields

Have real ten-year yields been rising between April 2020 and January 2021, explaining the rise in nominal yields? No. The fact that inflation expectations have been rising faster than nominal yields means that real yields have been falling since April 2020. And, the fact that shorter-term inflation expectations have been rising even faster than longer-term inflation expectations means that short-run real yields have been falling faster than long-run real yields:

Figure 6. Yield on 5-year and 10-year Treasury inflation-indexed security. Daily data since January, 2018.
Source: Fed St. Louis Database

Where should we look?

Given that the relation between expected inflation and yields is tricky (appears to be there now, but was muddy before January), it seems we need to think in terms of risk premiums. This is difficult. Perhaps the inflation risk premium has risen. Perhaps investors before January were more uncertain about inflation after five years than about inflation over the next five years, and demanded a compensation for this. It does not seem the most plausible story, but it is of course a possibility.

The obvious thing to shout is probably “debt”. It seems too early to go down that route, though. I present no analysis here leading credence to this story. And, there are many other potential explanations. It might be debt. But it might also be demographics, productivity, uncertainties, etc. There are many possibilities. The one that faces a hard time is trying to explain all developments in yields since the start of this rally by rising inflation expectations.

Last piece of evidence

The fact that ten-year yields have been rising faster than short-term yields during this recession is not unusual. Historically, around recessions, ten-year yields rise more than short-term yields, either during or right after the end of recessions (sometimes even right before recessions). This is what we have been seeing since April. The slope of the yield curve becomes steeper around recessions:

Figure 7. Yield on 10-year Treasuries minus yield on 5-Treasuries. Monthly data since 1983. Recessions indicated by shading.
Source: Fed St. Louis Database

The point I have been trying to make here is that the increase in the slope of the term structure (long-term yields rising faster than short-term yields) might not be unusual, but it is difficult to explain developments since April by simply saying “inflation is coming”. Expected inflation helps you explain some things, but not all.


Yields are currently going up because inflation expectations have started exceeding the 2% target rate of inflation. People start expecting the Fed to react at some point. This is fine and make sense. But inflation expectations have been going up for longer, since April 2020, and so have long-term yields, even when inflation expectations remained below two percent. Why did some yields (long-term) rise while others did not (short-term) when inflation was expected to remain below two percent and short-term inflation expectations rose faster than long-term expectations?


It’s this time of the year. This post recalls events of 2020. It has been such an unusual year, so different from what we expected. Luckily, there seems to be light at the end of the very long and dark tunnel, and – I hope – that 2021 will be considerably more joyful than 2020.

2020 started out so well. The roaring twenties and all that. Wuhan was a city I had not heard of, corona a beer people tell me is best served ice-cold with a slice of lime (I do not drink beer, tough I do enjoy wine), and social distancing words we would only get to know too well. Today, we know that Wuhan is a Chinese city with more than eleven million inhabitants and a marketplace where it presumably all started, corona also means something terrible, and social interaction is an activity we have come to miss so dearly.

At the time of writing, app. 75 million cases of corona/COVID-19/SARS-CoV-2 have been confirmed globally and app. 1.7 million people have passed away because of corona. Most countries have been in lockdowns, many still are (again), and the social and economic costs of the crisis have been enormous.

I started this blog in April 2020. This had nothing to do with corona. I had wanted to set up a blog for some years (people ask me where I find time for this, and I really do not know, but seemingly I simply like writing economic stories and analyses). Starting the blog in April this year, however, naturally implied that many of the blog posts have dealt with various economic and financial aspects of the pandemic. In this post, I will review some of the learnings from 2020.

The worst recession on record. With the highest growth rate on record

The recession started in February 2020 in, e.g., the US. Initially, it was caused by a supply shock: lockdowns were imposed and firms could not sell their goods and services and households could not go shopping. In April, when the IMF released their Spring Outlook, they labelled it “The Great Lockdown”. This was a suitable label. The IMF also noted that “This is a crisis like no other” and that “many countries now face multiple crises—a health crisis, a financial crisis, and a collapse in commodity prices, which interact in complex ways”. As unemployment and bankruptcies increased, households and firm got nervous, and demand suffered, too.

The path of economic activity has been highly unusual. This graph shows the quarterly percentage changes in US real GDP since 1947:

Quarterly percentage changes in US real Gross Domestic Product. 2020 encircled.
Source: Fed St. Louis Database

2020 is very much an outlier. On average, from 1947 through 2020, real GDP has grown by 0.8% per quarter. Until 2020, quarterly growth had never exceeded 4%. Economic activity had never contracted by more than 2.6%. Then came the Great Lockdown. During the second quarter of this year, economic activity contracted by 9%. This is almost four times more than the otherwise worst contraction on record. In this sense, it was the worst recession ever.

It has also been the weirdest recession ever. During this recession, we have also witnessed the highest growth rate on record: economic activity expanded by 7.4% during Q3. This is twice as much as the otherwise highest growth rate on record.

This puzzling feature of the recession led me wondering what a recession really is (link). I expressed sympathy with members of the NBER Recession Dating Committee. They face a particularly difficult task this year. Should they conclude that we had one V in spring, with the recession ending in late April, and then a new V now, i.e. two separate Vs (VV), or that we have had one long recession with a double dip, i.e. a double-V (W)? Does it make sense to call it a recession when we experienced the fastest rate of growth in economic activity on record? If you conclude that the economy cannot be in recession when it expands at its fastest growth rate ever, then you must conclude that the recession ended during Q2. But, the NBER Recession Dating Committee has not called the end of the recession yet, i.e., officially, the recession is still ongoing.

You may ask why it is important to know whether the recession ended in April or whether it is still ongoing. The development in economic activity is what it is, whether we call it recession or not. It is important because a “recession” is such an important concept in economics. We inform the public, business leaders, students, and others about the characteristics and consequences of recessions. If a recession can contain the by-far strongest expansion of economic activity on record, we need to change our understanding of recessions.

The very unusual behavior of economic activity during Q2 and Q3 caused very unusual, and scary, developments in unemployment and related aspects of economic activity. This graph shows the monthly change in the number of unemployed in the US:

Monthly changes in the number of unemployed in the US. Millions. 2020 encircled.
Source: Fed St. Louis Database

During March, unemployment in the US increased by 16 million. Again, this was beyond comparison. Until March 2020, the number of unemployed had never increased by more than one million over one month. In March 2020, it increased by 16 million.

As the virus contracted during summer, unemployment fell. There has never been as fast a reduction in the number of unemployed as the one occurring during this summer. In May, the number of unemployed dropped by more than three million. Until May 2020, the number of unemployed had never fallen by more than one million over one month. In May 2020, it fell by more than 3 million. So, within a year, we have had the strongest-ever increase in unemployment, but also the largest-ever fall in unemployment. By far.

Such dramatic events happened all around the world. I documented this here (link) and here (link).

Inspired by these events, I did something admittedly nerdy. I calculated the probability that we would experience events such as these, given the historical data (link). I found the unconditional likelihood that we could see the increase in newly registered unemployed that we saw in spring to be 0.97 x 10^(-841). This is a zero followed by 841 zeroes and then 97. For all practical purposes, this is a zero-probability event. But it did happen. It was just very, very unusual.

The stock market

I use some of my time (a significant part, by the way) to try to understand the stock market. This has not been a straightforward task this year.

Today, the global stock market is 13% percent above its January 1 value, the US stock market is 18% higher, and the Danish stock market 29% higher (MSCI country indices). Given that we have been through the worst recession ever, and that the recession is not officially over yet, this is not what one would have expected prior to the events.

Then, on the other hand, in hindsight it is perhaps not so strange. The recession has been the worst on record, yes. But, we have also had the fastest growth in economic activity on record. I argued (link) that if we imagine that the recession ended in late April, when economic activity bottomed out, the behavior of the stock market fits perfectly well with the historical evidence on the behavior of the stock market.

Central banks have certainly played their role, too. When markets melted down in March, central banks intervened heavily. In contrast to the financial crisis of 2008, it was not banks that were in trouble this time, but firms. Firms could not sell their goods and services due to the lockdown. The limitless purchases of government bonds that central banks have become used to during and after crises thus probably did not do much good (evidence came out that central bank purchases of government bonds are less effective than we are often told, link ). What turned things around, instead, was the announcement on March 23 that the Fed would facilitate credit to firms (link). This was a new policy tool. It led to a complete turnaround of events. I produced this graph (I still think it is a supercool graph): 

Difference between yields on ICE BofA AAA US Corporate Index and 3-month Treasuries (Left hand axis) as well as the SP500 inverted (Right hand axis). Both series normalized to one on January 2, 2020. Vertical line indicates March 23.
Source: Fed St. Louis Database

The graph shows how the stock market lined up with credit spreads. Firms were suffering, and their credit spreads started widening, in late February. The stock market suffered. The Fed announced it would provide credit to firms on March 23. Credit spreads tightened. The stock market cheered. The graph summarizes how the Fed saved credit and equity markets. And, strikingly, the Fed did so by merely announcing they would intervene. Up until today, the Fed has not intervened a lot. In this sense, it was a “Whatever it takes moment of the Fed”.

It should be mentioned that the Fed announced other initiatives on March 23, too, such as the Main Street Lending Program (link) and the Term Asset-Backed Securities Loan Facility (link). The Corporate Credit Facilities were the ones that directly targeted corporate bonds, though. Due to the nature of this crisis, the stock market lined up with credit spreads during this crisis, as the above graph reveals, emphasizing the importance of the announcement of the Corporate Credit Facilities.

Eurozone troubles, or rather no Eurozone troubles

The fact that we have not had to talk a lot about the risk of a Eurozone breakup since summer has been a positive surprise. In spring, there was talk about the risk of a Eurozone crisis. Like so often before, Italian sovereign yields rose relative to German sovereign yields. There was reason to be anxious. I argued that “Some kind of political solution at the EU level would be needed” (link).

This we got. The European Union agreed on a “Recovery and Resilience Facility” (link) that includes both loans and grants. EU has moved one inch closer towards a common fiscal policy. Who will pay is not clear, but EU has shown solidarity. I believe this is positive. At the same time, the European Central Bank continued its interventions and bought a lot of Italian debt. This has kept yields on sovereign bonds low. Here is the Italian-German yield spread during 2020:

Italian yield spread towards Germany. Ten-year government bonds. Daily data: January 2, 2020 – December 21, 2020.
Data source: Thomson Reuter Datastream via Eikon.

Italian yields have been falling continuously since summer, when the EU agreed on its recovery plan. It is positive that we have not had to discuss Eurozone troubles. We have had so many other troubles. Whether this means that we do not have to discuss Eurozone troubles again at some point, I am less sure. But, that is for another day.

Banks have been doing OK

The risk of a Eurozone breakup did not materialize. Another risk that did not materialize was the risk of systemic bank failures. This is positive as well, as economic activity suffers so much more when banks run into trouble and credit consequently does not flow to its productive uses.

During the worst days in March, stress in the banking system intensified. For instance, the spread on unsecure interbank lending increased relative to secure lending:

The TED spread. Difference between 3-Month USD LIBOR and 3-Month US Treasury Bills. Daily data: January 2, 2000 – December 14, 2020. 2020 encircled.
Data source: Fed St. Louis Database.

Stresses lasted only a few days, though. During the financial crisis in 2008, on the other hand, spreads remained elevated for much longer. This time, trust in the banking system was quickly reestablished.

I think I am allowed to claim that this was one of the predictions I got reasonably right. In autumn 2019, when nobody knew about the upcoming crisis, I wrote a policy paper on the Nordic financial sector. It was presented in December 2019 and finally published in June this year (link). I argued that banks are safer today, compared to 2008. Some doubted my conclusion and said, “just wait until the next crisis, then you will see that banks are not safer today”. Well, few months later we had the worst recession ever. Luckily, though, we have not had bank-rescue packages and we have not had to bail out banks. Banks have been withering the storm. In some instances, banks have even been part of the solution by showing flexibility towards troubled firms. I am not saying everything is perfect, but I am saying that the situation has been very different from the situation in 2008. On a personal note, this made me happy, too, as it would have been somewhat embarrassing if banks had failed at the same time I published an analysis arguing that the banking sector is safer. This, luckily, did not happen. Instead, the banking system turned out to be far more resilient than in 2008, as I predicted.

You may add that the Fed rescued markets during spring, as mentioned above, and thereby rescued firms and subsequently banks. True, but there was certainly also tons of rescue packages in autumn 2008. Banks nevertheless failed in large numbers in 2008. They did not this time around. Perhaps, thus, we did learn something from the financial crisis of 2008, and have gotten some things right. This would be no small achievement.

US election and Brexit

There have been other events, for instance the US election and Brexit negotiations. In normal years, such events would potentially have been among the most important events for markets and the economy. This year, the pandemic has certainly been more important. I did manage to write a post on the US election and the stock market, though (link). I discussed evidence that stock markets perform better under Democratic presidents. Only time will tell whether the same will happen under Biden.  

I did not manage to find space to discuss Brexit, but we got a trade agreement on Dec. 24 (link). Hopefully, the EU and UK can now move on.

The cost of the crisis

It is impossible to summarize the pandemic in one number or one word. Hence, I will not attempt to do so. But, I did present a calculation of the expected cost of the crisis in Denmark (link). I arrived at DKK 336bn, or app. USD 10,000 per Dane. This calculation generated some attention in Denmark.

One can discuss every single assumption one needs to make when calculating the expected cost of a crisis: What is the value of a statistical life? What is the value of a statistical life of those who pass away due to COVID-19, i.e. who are typically above 80? What is the past loss as well as the expected future loss in economic activity due to the crisis? Does it make sense to present one number when there is so much uncertainty? And so on. These are all fair points, but if we want to have a meaningful discussion of the impact of the crisis, we have to start somewhere.

In my calculation, I closely followed the assumptions of Cutler & Summers, such that US numbers and Danish numbers can be compared. This allowed me, for instance, to conclude that the cost of the crisis in Denmark, most likely, will be much lower than the cost of the crisis in the US.


I must admit I find it difficult to end this last post of 2020 on a happy note. Right now, at the time of writing, the situation is bad in the country I live, Denmark, and in many other countries in Europe and around the world. Numbers of new cases and deaths have been rising recently, or are on the rise again, and more and more restrictions and lockdowns are being imposed. Days are grey and short. The crisis has already been tremendously costly and it is clearly not over yet.

Nevertheless, I will try to end the post on a positive note. It gives me hope that several countries have started vaccinating people, and it seems to be working well. Finally, the EU also starts vaccinating people now. This has taken way too long, however, given the severity of the crisis and the fact that other countries started weeks ago. And, yes, every day counts. If it is correct, though, and I deliberately write if, that the EU has failed when it comes to the approval process and purchase of vaccines, as the normally well-informed and serious magazine Der Spiegel claims (link), it is a scandal. Biden aims to vaccinate 100m Americans within his first 100 days in office (link), close to a third of the US population. As things look now, it seems unlikely that we will be able to achieve the same in Europe. Christmas is all around us, though, so let us hope that somehow things will develop in the right direction.

Therefore, let me focus on the bright side. With the jabs, the situation will most likely start to improve within a not too distant future. I will try to convince myself that I see weak light at the end of the long and dark tunnel, even when we probably have to wait many months before things really calm down. Days are at least getting longer. I will focus on this, then.

With this, which is meant to be a positive message, let me thank you all for reading this blog and for sending me many encouraging mails with feedback. Please keep on doing so – it is highly appreciated.

I conclude by expressing hope that next year will be considerably more joyful than the one we leave behind.

Happy New Year!

Quantitative Easing (QE) and biases in research

Do asset purchases by central banks raise economic output and inflation? An interesting new paper finds an affirmative answer, but also – and this is the main point – that the size of the effect depends on whom you ask. If you ask central bankers, they will tell you that the effect of QE is large. If you ask independent academic researchers, they will tell you it is considerably smaller. This difference indicates that central-bank research on this topic might be biased. It also indicates that Quantitative Easing is probably not as effective as we are told.

One of the defining characteristics of financial markets since the financial crisis in 2008 is the use and influence of “unconventional policy tools” by central banks. As monetary policy rates have been close to zero, central banks have been unable to stimulate the economy via even lower interest rates. Instead, central banks have started purchasing financial assets, mainly government bonds. These alternative policy tools are labelled “asset purchases by central banks”, or simply “Quantitative Easing (QE)”.

Quantitative Easing increases the demand for government bonds, thereby raising their price and bringing down their yields. When yields on government bonds fall, other yields in the economy, such as yields on mortgage bonds, fall, too. This should promote economic activity and raise inflation, central banks argue.

Quantitative Easing is not uncontroversial, though. In several of my posts (link, link, and link), I have argued that it raises other asset prices in the economy, such as stock prices. Some fear that this induces bubble-like behavior in asset prices. Also, QE might distort signals from asset prices, causing unclear signals from prices about the underlying state of the economy and financial markets. In addition, by raising other asset prices, Quantitative Easing might contribute to increasing inequality, as financial assets are typically held by the already wealthy. On the other hand, if QE helps promoting economic activity, it helps reducing unemployment among low-income groups, which should reduce inequality, central banks argue in return (link). In the end, then, to justify Quantitative Easing, it should have a sizeable impact on inflation and output, outweighing the potentially negative effects on other parts of the economy.

Many papers have analyzed the effects of quantitative easing. A brand-new paper (link) summarizes these analyses and asks the question whether results are more positive when central bank economists analyze QE. Given that central banks influence public opinion, the latter question is important when we evaluate the most significant policy intervention during the last decade.

There are two reasons why I think this paper is particularly interesting. First, it summarizes research on QE in a neat way. It concludes that QE is effective, but not as effective as we are often told. Second, it emphasizes the importance of independent academic research. As the faculty representative on the Board of Directors at Copenhagen Business School, stressing the importance of academic research, I find this to be an important conclusion, too.

To avoid any misunderstandings about my own view, let me stress two things before getting to the results.

First, I believe that targeted central bank intervention can be useful. In my last post, I describe one monetary policy intervention that clearly fulfilled its goal (link). During a crisis, if markets are malfunctioning, there can be good reasons for policy interventions. On the other hand, I am skeptical towards the view that the advantages of endless asset purchases by central banks outside crisis periods outweigh their disadvantages. This paper indicates that QE is less powerful than central bankers tell us, lending some support to this view.

Second, my point here is not to say that central bank research is suspicious in general. On the contrary, I strongly recommend central banks to invest in economic research. I believe that better decisions are taken when based on solid academic analyses. So, central banks should be encouraged to invest in research, but their own evaluations of their own actions are probably not unbiased.

The study

Brian Fabo, Martina Jancokova, Elisabeth Kempf, and Lubos Pastor (link) study 54 analyses, written/published between 2010 and 2018, of the effects of quantitative easing in the US, the UK, and the Eurozone. 57% of the papers have been published in peer-reviewed journals. 60% of the authors are affiliated with central banks.

Lubos Pastor and co-authors collect estimates of the effect of QE on economic output and inflation across the 54 studies and report the average (and median) effects. They also investigate whether the reported effects are different if a study is conducted by central bank researchers.

Bias in central bank research

Pastor et al. list five reasons why central bank research might be biased (directly taken from the paper, page 2, here):

  • ”First, the economist may worry that the nature of her findings could affect her employment status or rank. Is she less likely to get promoted if her findings dent the bank’s reputation? Could she get fired?”
  • ”Second, the economist may be unsure whether her research will see the light of day. Bank management could in principle block the release of studies that find the bank’s own policy to be ineffective, or to have undesirable side effects.”
  • ”Third, the economist may suffer from a confirmation bias (Nickerson (1998)). A central bank employee may believe a priori that the bank’s policies are effective, and she may select evidence supporting her prior.”
  • ”Fourth, the economist may care about the bank’s reputation.”
  • ”Finally, the economist may care about her own reputation if she is senior enough to have participated in the formation of the bank’s policy.”

The findings

The main findings of the paper are collected in this graph:

Source: Fabo, Jancokova, Kempf, and Pastor (2020)

Pastor et al. report that a QE-program at its peak, i.e. when a QE program has its maximum effect, on average (across the 54 studies) raises GDP by 1.57% and the price level in the economy by 1.42%, as indicated by the blue columns in the graph (”Average all studies”). This seems to be relatively large effects, I would say.

Do these effects depend on the affiliations of researchers? Pastor and co-authors find that central-bank affiliated researchers report significantly larger effects. If counterfactually changing the share of central bank researchers in a study from 0% to 100%, the peak effect on output is estimated to be 0.723%-points larger and the peak effect on the price level 1.279%-points larger. I illustrate this in the figure above as the “Effect of CB authors”. Compared to the overall average effect, the effect of central-bank authorship is large. For the price level, going from 0% to 100% central-bank authorship almost corresponds to the total average estimated effect of QE on price levels across all 54 papers . In other words, if you think central bank estimates might be biased, the ”true” average effect of QE programs is considerably smaller than the estimated overall average effect.

Pastor and coauthors report the average point estimate of all papers and the additional effect of central bank affiliation, as indicated in the figure above. They do not report the average estimate from papers written by central bank authors, respectively written by academic authors. I asked Lubos Pastor about this. In private email correspondence with Lubos and Elisabeth Kempf, they inform me that papers written by central bank authors (defined as papers with at least one central bank author) estimate a 1.752% peak effect on output. Papers written by academics (defined as papers with zero central bank authors) find a considerably smaller effect, 0.996%. For inflation, the peak effect on output is 1.791% for papers written by central bank affiliated authors. Academics estimate a much smaller effect, only 0.545%. In spite of massive asset purchases (we are literally talking trillions of dollars, euros, and yen), the average effect on inflation is small, at 0.5%, academics report. Less than a third of what central bank affiliated researchers report.

As academics, we are not only interested in the size of the coefficients/effects, but also whether effects are statistically different from zero. Pastor and coauthors report a striking finding here. While all papers written by central bank researchers find that QE has a statistically significant effect on output/inflation, only 50% of papers written by independent academics find significant effects.

Finally, Pastor and co-authors note that the German central bank (the Bundesbank) has been particularly skeptical towards ECB QE. So, what happens if you look at researchers affiliated with the German central bank? Bundesbank researchers find much smaller effects of QE. In fact, Bundesbank researchers find an even smaller effect of QE on economic output than independent academics. Again, this indicates that the preferences of an institution seem to influence the conclusions of its researchers.

The paper presents additional analyses, such as looking more closely at the mechanisms at play, i.e. career concerns, involvement of management in research, and so on. Read the paper if you want to know more about this.


I think the paper by Brian Fabo, Martina Jancokova, Elisabeth Kempf, and Lubos Pastor is interesting also because it summarizes what the average effect of QE is, based on a large number of studies. Across more than 50 papers, the average maximum effect of QE on GDP and the price level is around 1.5%. This is useful information in itself.

Some papers are written by central bank researchers and some by independent academics. It seems reasonable to hypothesize that central bankers might have a tendency to view their own policies in a more favorable light. This is what Lubos and co-authors find. They report that the effect of having central bankers as authors of an analysis is almost as large as the average reported effect of QE on the price level itself. In private email correspondence, they also tell me that the average effect, estimated in academic papers, of QE on the price level is only 0.5%, i.e. very small, almost negligible. This is of course a controversial result. I predict it will generate intensive debate.

The fact that I discuss this paper here should not be taken to imply that I am skeptical towards central bank research in general. In fact, I am sure the quality of monetary policy decisions is improved when central bankers have access to the latest research. Also, I have no reason to believe that central bank research on other topics than monetary policy should be biased. But, when it comes to assessing their own actions, researchers in central banks might be subject to certain biases. It requires some guts to tell senior management that the trillions they have spent on quantitative easing probably has not been very effective. Instead, it might further your career if you paint a rosier picture. This is important to recognize.

I view the bottom line as follows: QE probably has some effect, but its effect is considerably smaller than we are told by central banks.