Quantitative Easing, Hyperactive Finance, and the Incentive to Invest

Jonathan Oppenheimer, June 2021

Key points

• Quantitative easing (QE) may have unintended consequences that are potentially damaging for productive investment and the long-term health of our economies, requiring interventions by policymakers to reduce the risks.

• Both conventional and unorthodox monetary policies impact on wealth and the cost of borrowing or saving, but they differ in the assets and the types of interest rate being manipulated and the people and firms most directly influenced as a result.

• Expansionary QE may exacerbate wealth inequalities by boosting the value of longerterm assets that are disproportionately held by larger and wealthier financial investors.

• The weakness of the bank lending channel under QE means that the impact on financial conditions is more likely to be felt by businesses with access to capital markets than smaller or medium-sized businesses that rely on bank lending.

• Moreover, smaller businesses already face a higher hurdle rate for investment, given the challenging and uncertain macroeconomic outlook, and regulatory costs that are disproportionately burdensome for firms that do not operate at scale.

• Governments should ensure that small-business lending schemes continue to be available for as long as policy rates remain at or close to the lower bound and lending decisions by commercial banks are less directly influenced by monetary policy.

• Policymakers can encourage productive investment by reducing the regulatory overhead that drives a wedge between the gross and net return from investment, and by doing so, lowering the effective hurdle rate for investment in productive assets.

• Policymakers should systematically assess the potential impact of existing and new regulations on investment with a view to minimising the costs, especially fixed costs that are especially burdensome for small and medium-sized businesses.

• Under QE, the value of investor portfolios is more sensitive to policy changes, or even to nuanced signals about future changes, both because of the importance of policy signals and the convex relationship between asset prices and yields.

• To reduce bias towards price discovery over value discovery – which inhibits productive investment, as it promotes short-termism – policymakers should reassess the merits of pro forma reporting by public companies.

• Policymakers should also avoid a blinkered pursuit of market liquidity through increased trading volumes as this may encourage high-turnover trading strategies at the expense of more engaged capital that backs productive investment.