Quantitative easing is not as unconventional as it seems

Policy interest rates do not have to be short. The means by which monetary authorities influence prices and quantities can differ, but the obstacles to altering one rather than the other are not insuperable. Inflation is sluggish, and expectations of future interest rates—long and short, nominal and real—are diverse and uncertain. These factors determine the limited power that monetary authorities enjoy when they conduct quantitative easing. But this policy is not as unconventional as some have claimed, and indeed can be viewed as broadly similar to conventional monetary measures. The impact of quantitative easing, however, could be very different depending on the underlying structure of the economy and the fiscal authorities’ responses. Finally, we note some important caveats that must be borne in mind when trying to evaluate the impact of quantitative easing, particularly given the fact that the world’s main financial markets are closely linked.