Central Bank Policy, Quantitative Easing, and Asset Price Transmission

Abstract

Central bank monetary policy—traditionally conducted through short-term interest rate targeting—reached its zero lower bound (ZLB) constraint during the 2008–2009 Global Financial Crisis and again during the COVID-19 pandemic, forcing the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England to implement unconventional monetary policy including quantitative easing (QE): large-scale asset purchase programs that expand the central bank’s balance sheet and directly affect longer-term interest rates and risk asset prices. The Federal Reserve’s balance sheet grew from approximately $900 billion before the GFC to $8.9 trillion by 2022 through successive QE programs (QE1: 2008–2010, QE2: 2010–2011, QE3: 2012–2014, COVID-era QE: 2020–2022). This paper reviews QE’s theoretical transmission mechanisms, the empirical evidence on QE’s effects on interest rates and equity prices, the portfolio balance channel, the wealth distribution implications of unconventional monetary policy, and the financial stability implications of extended easy monetary conditions.