Monetary policy: Is QE deflationary?

Posted: December 5, 2013 in economy
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STEPHEN WILLIAMSON is an economist at Washington University in St Louis, specialising in monetary economics. He is also an instigator. And what he has most recently instigated is an epic blogospheric debate over whether quantitative easing—the practice of printing money to buy assets, and nightmare fuel for the hard-money set—is deflationary. Noah Smith has done a wonderful job keeping track of the vollies, so those interested in further reading should start there.A very horribly simplistic summary of the debate is: Mr Williamson argued that basic monetarist economics, as expressed in several equations, implies that QE should generate falling inflation; critics responded that his argument doesn’t make sense and asked him to explain, in words, just how QE might generate falling inflation; Mr Williamson explained, in words, that his equations imply that QE should generate falling inflation. I think that’s where things stand at the moment. And now seems as good a time as any for me to weigh in.Is QE deflationary? Yes, quite obviously so. Consider:A central bank that is deploying QE is almost certainly at the zero lower bound.QE will only help get an economy off the zero lower bound if paired with a commitment to higher future inflation.If a central bank is deploying QE over a long period of time, that means it has not paired QE with a commitment to higher future …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/12/monetary-policy?fsrc=rss

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