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Friday, May 11, 2012

My nth QE2 rant provoked by Roger Farmer

I have a partito preso (publicly stated position) so caveat lector, but on figure 1 vertical line for I say humbug. The Jackson hole conference is the earliest possible date for QE2, but the figure shows it is about two months after the S&P 500 turned up. This is not how event studies are done. One might look at the hour when Bernanke made his speech, or the day or evem the week, but the idea that asset prices are sticky, so what's a couple of months is nonsense.

The link is out of place as iPaste with an iPad

Also, as you argue above, the general equilibrium effect of monetary loosening shouldn't outweigh the direct effect. QE2 was purchases of 7 year Treasury notes whose price went down. This is what one would expect if something else caused higher forecast growth.

Note, I am not talking about QE1. My objection is to the assumption that RMBS and 7 year Treasuries are exactly the same things, so one can evaluate the effect of purchasing that thing. I think it is fully fair to say that almost everyone who writes about QEn bases their analysis on this maintained assumption. Joe Gagnon (who is a person of some importance in the literature) advocates more purchases of RMBS. The idea is (and always has been) for the Fed to remove risky assets from the market, so the point is low quality as well as high quantity. Ignoring the difference between RMBS and Treasury notes weakens the case and makes it easier for Fed conservatives to obtain a compromise in which QE3 (or 4 counting Twist) is allowed only so long as it is as close as possible to a worthless open market exchange of almost identical assets.

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