Guest post by Luis Enrique (edited from an e-mail by LO)
Something I find particularly striking is how few people seem to recognise how similar QE is to standard monetary policy. QE is often called something like a bank bailout by the back door, or corporate welfare, or a harbinger of hyperinflation, but that doesn’t make much sense in the context of actually existing monetary policy.
In standard macro theory, if people want to hold more money they will sell interest bearing bonds for cash, which would increase interest rates. But if the BoE is targeting say a 2% rate, it will create money and buy bonds to keep they rate at 2%. So changed in money demand are accommodated.
If the BoE wants to cut the rate from 2% to 1% it announce it is doing so and will print money and buy bonds to get it there. This will cause bond prices to rise, creating a “windfall” for bond holders and banks that charge fees for trading bonds. The money it creates thus doing is every bit as inflationary as the money created by QE. Probably more so, in fact, because the money is less likely just to sit in reserve.
Many people object vociferously to QE yet yet wouldn’t blink at a decision to cut interest rates from 2% to 1% despite their similarities.