What's Wrong with Monetary Policy

What's Wrong with Monetary Policy

Daniel Lacalle 30/08/2018 5

In a report called “A report card for unconventional monetary policy,” Deutsche Bank has analyzed the impact on the economy of “unconventional” monetary policies, quantitative easing and negative interest rates.

They have analyzed the impact on manufacturing indices from the beginning to the end of these measures, and have found the following results:

1. In eight of the 12 cases analyzed, the impact on the economy was negative

2. In three cases, it was completely neutral

3. It only worked in the case of the so-called QE1 in the US, and fundamentally because the starting base was very low and the US became a major oil and gas producer.

As Torsten Slock, the analyst at Deutsche Bank, explains, that in eight out of twelve cases the impact was negative speaks for itself.

“How do you evaluate if QE and negative interest rates are working? When I discuss this with clients, I sometimes get the response that QE and negative interest rates are working well because the payment systems are running and the financial system still functions. But the issue is not if computers can deal with negative interest rates. The issue is if QE and negative rates have been supporting the economy.

The chart below looks at QE and negative rates across countries and the impact it has had on ISM and PMI across countries, from start to end of each unconventional policy. The conclusion is that US QE1 had an impact but in all other cases the impact of QE and negative interest rates has been insignificant. And in 8 out of 12 cases, the economic impact has been negative.

Once again, there is too big of a burden on monetary policy and it is time for fiscal and structural policy to step up and begin to support GDP growth.”

The European case is truly amazing:

But the Japanese one is simply staggering:

Central Banks Balance Sheet vs Global GDP

Last two charts via @dailyeconomist

Merrill Lynch also shows the poor QE results:

A version of this article first appeared here

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  • Alice Ward

    Monetary policies have failed repeatedly and continue to operate on flawed logic.

  • Sean Wilson

    Interest rate cuts miserably failed to kick-start new economic cycles.

  • John Rimington

    Private debt levels are sky high in almost every developed country.

  • Nick Davey

    The success of monetary policy depends on market mechanisms.

  • Zack Avery

    This is not surprising at all. Monetary policy has failed to produce a robust recovery for most developed countries. A large fiscal stimulus is needed in the future.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).


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