It is clear that the current approach to monetary policy – which essentially hasn’t changed for three years – is failing to achieve the economic pick-up that the government and policy makers assumed it would have by now. So experimenting with how QE is used in the future, and thinking strategically, would not be as disastrous a policy as some would have you believe, argues Josh Ryan-Collins, Associate Director of the Economy and Finance team at New Economics Foundation in the article entitled ‘Strategic Quantitative Easing – public money for public benefit’, 12th August 2015
Here’s a short extract:
Corbyn’s proposal last week was to bypass the financial markets and ensure the Bank of England’s money is directly spent on building homes, roads and energy infrastructure – a way of financing important projects without raising the public deficit.
His approach has received a negative reaction in some quarters, with claims that ‘printing money’ to spend on public investment would lead to inflation, distort the economy and damage the Bank of England’s independence. But there is little evidence to support these claims.
Responding to critics
If new money were injected into the economy for infrastructure, it could be inflationary – ie. pushing wages too high – if the economy was already at full capacity. But according to the Bank of England there still is considerable spare capacity in the economy, median wages remain well below historical averages and current inflation is at 0%, these concerns don’t apply.
There is also evidence that infrastructure investment has a strong multiplier effect, stimulating the economy proportionately more than other forms of spending, for example through new supply chains for small and medium sized enterprises.
The claim that the Bank of England’s independence would be jeopardised assumes that the effects of existing QE policy are neutral or independent. But the Bank’s own analysis has shown that QE has had major distributional impacts, essentially supporting those with houses or financial assets at the expense of those who do not.
Read the whole article here.