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Abstract:
This paper argues that the theoretical origin of Quantitative Easing (QE) programs, as a general concept, clearly links to Friedman's (and monetarist) ideas, but that the specific implementation of QE operations to cope with the 2008 financial crisis does not comply with key principles developed by Friedman. Based on Friedman's work during the sixties, I contend that his monetary framework links to QE through what he (and Anna Schwartz) called the "monetary" effects of monetary policy and not the portfolio balance effect highlighted by Nelson (2011) and Bernanke (2012). The combination of the "monetary" effects and the stabilizing role of monetary policy should produce QE programs with a path of the monetary base (central bank assets) and M2 that differs dramatically from what transpired under the 2008-2014 QE arrangements based on the portfolio balance effect.
Keywords: Monetary Policy, Quantitative Easing (QE) programs, Behavioral Macroeconomics
JEL Classification: E52, E58.
Introduction
Many economists and other analysts have pointed out that Milton Friedman's remarks on the necessity of an expansive monetary policy in Japan after its 1991 financial crisis, is a prima facie evidence that he would have supported the Quantitative Easing (QE) schemes implemented by the Federal Reserve (Fed) and other major central banks since the 2008 financial crisis. This unqualified extrapolation of Friedman's comments to the QE programs put in practice since 2008, however, ignores completely the monetary policy framework that Friedman developed specially during the sixties. In contrast to the loosely supported connections between Friedman's ideas and the 2008-2014 QE programs, Nelson (Nelson 2011) and Bernanke (Bernanke 2012) argue formally that Friedman's monetarist portfolio balance theory provides a solid theoretical link between its monetary framework and the most recent QE operations developed by the Fed and other major central banks.
This paper argues that the theoretical origin of QE programs as a general concept clearly links to Friedman's (and monetarist) ideas, but that the specific implementation of QE operations to cope with the 2008 financial crisis does not comply with key principles developed by Friedman. Based on Friedman's work, I contend that his monetary framework links to QE through what he (and Anna Schwartz) called the "monetary" effects of monetary policy and not the portfolio balance effect highlighted by Nelson (Nelson 2011)...