When I advocate something like QE or negative interest on reserves, I often get people complaining that this will not boost bank lending, or that we shouldn’t even be trying to boost bank lending. It almost makes me want to tear out my hair. What in the world does banking have to do with monetary policy? Yes, it may or may not boost bank lending, but it doesn’t matter, as monetary policy is about the hot potato effect. And yes, the Fed should not be trying to boost lending, any more than it should try to boost sales of microwave ovens. NGDP is what matters.
Jim Glass directed me to a new study by the Bank of England, which confirms that monetary policy is about the hot potato effect (aka portfolio rebalancing channels) not bank lending. Here is the abstract.
We test whether quantitative easing (QE) provided a boost to bank lending in the United Kingdom, in addition to the effects on asset prices, demand and inflation focused on in most other studies. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks’ balance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty’ deposits), then the traditional BLC is diminished. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies which suggest that QE boosted aggregate demand and inflation via portfolio rebalancing channels.
PS. I have a new post over at Econlog that is far more important than this post. Read the whole thing.