Tactical Lessons from Quantitative Easing in Canada
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KEY HIGHLIGHTS FROM OUR MARCH 2021 DISCUSSION FROM "TACTICAL LESSONS FROM QUANTITATIVE EASING IN CANADA"
When the global pandemic first began more than a year ago, central banks around the world initiated or dramatically expanded Quantitative Easing (QE) programs to mitigate the economic and financial fallout from the pandemic.
In a discussion with Warren Lovely, National Bank of Canada and Christopher Ragan, McGill University on March 2, 2021, GRI asked the two leading economists to talk about the inaugural QE program launched by the Bank of Canada in 2020 to support Canadians. Together, they shared their perspectives on implementing QE, how it has helped and how it cannot continue over the long term.
The session began with Christopher Ragan outlining the effective lower bound problem Canada was facing at the start of the pandemic with near zero interest rates and why the Bank of Canada introduced QE to provide monetary expansion.
Mr. Ragan explained the difference between QE and CE (Credit Easing) and why one may be used over another. QE is a situation where the central bank purchases long term government bonds in the secondary market. In CE, the central bank purchases private bonds instead of government bonds. The distinction between the two is that QE increases the amount of reserves in the money supply while CE does not change the total amount of reserves or money in the system. The objectives of the two are different. The objective of QE is to drive down all rates at the long end. CE targets specific parts of the credit market to keep interest rates in check and support a smooth functioning of the credit markets.
The Bank of Canada has used both QE and CE since the pandemic. Chris argued that while CE was necessary in the short run, he questioned whether the Bank of Canada really needed to participate in QE the way they did. He asked whether an increase in interest rates would have been so bad, as there are problems associated with having low rates for extended periods of time. On the topic of exiting from QE, Ragan said if we were to exit, we would need to do so carefully. However, he also conceded that an exit may not be necessary immediately. Given QE injected huge amounts of money into our commercial banking system, it may be possible to keep those assets on the balance sheet indefinitely without stoking inflation. As long as the Bank of Canada holds these assets in their accounts, inflationary pressures can be avoided, he said. But once these assets start being lent out, impacting aggregate demand and creating inflationary pressures, that’s when Canada should begin exiting QE.
Warren Lovely said we shouldn’t look at the Bank of Canada’s QE program in isolation. For example, the Bank of Canada’s announcement of a provincial bond purchase program sparked recovery in provincial borrowing costs and credit spreads. Putting the Bank’s asset purchase program in perspective, Mr. Lovely also provided a brief market perspective. With no policy playbook in place, Canadian policymakers responded with some traditional fiscal stimulus, but the size and speed in which they did so was unprecedented. What began as theoretical discussions about unconventional monetary policy became real.
QE has left an indelible footprint in the federal bond market, Lovely said, continuing to rise at 1.3% a month. While the Bank’s program hasn’t been out of line with what some other central banks have been doing, he cautioned that the Bank may be overdoing it on QE. He was quick to add that with no intent to criticize the Bank’s QE program, Canada has had very little experience with this monetary tool.
He suggested it may be time to think not necessarily about exiting QE, but moderating the program size to neutralize and stabilize the Bank’s footprint, while providing critical support to the market and keeping longer term borrowing costs low. He contended the Bank can taper its QE while still providing meaningful stimulus. It can do so in a way that will moderate the backup in the mid- and longer-term rate structure.
Upcoming webinars in the 2021 GRI Macroeconomic Policy series include:
- The Good, the Bad, and the Ugly of our Canadian Economy and How to Fix it with Don Drummond, Adjunct Professor and Stauffer-Dunning Fellow, Queen’s University and Jack Mintz, President’s Fellow, School of Public Policy, University of Calgary — Tuesday April 8
Past webinars in the 2021 GRI Macroeconomic Policy series include:
- Modern Monetary Theory, the Deficit Myth and New Economic Paradigm with Stephanie Kelton, American economist and leading authority on MMT — Friday February 5
- Strategic Challenges and Structural Risks with Ultra-Low Interest Rates and Quantitative Easing with Bill White, former Deputy Governor, Bank of Canada — Thursday February 18