ChainWhat it assumes · how to break it
Start
The Bank of England creates new central bank reserves and uses them to buy government bonds (gilts) from pension funds, insurers and other financial institutions.
1
As a result, gilt prices rise and long-term interest rates fall.
bond yield
bond yield
Assumes: QE moves gilt prices.
But: Gilt prices were already rising for global reasons, so QE's own effect is hard to separate out.
2
This means investors move into shares and corporate bonds, and cheaper mortgages raise demand for housing, so share prices and house prices rise.
asset prices · portfolio rebalancing
asset prices · portfolio rebalancing
Assumes: Asset prices respond to lower interest rates.
But: Low interest rates around the world were also pushing asset prices up, so not all of the rise is down to QE.
3
Consequently, the gains go to those who own these assets, mostly older and wealthier households with shares, pensions and property.
distribution of wealth
distribution of wealth
Best link to attack
Assumes: Asset ownership is concentrated.
Assumes: Asset ownership is concentrated.
But: Many workers own shares indirectly through workplace pensions, so the gains are spread more widely than direct share ownership suggests.
4
At the same time, higher house prices make it harder for first-time buyers to save a deposit and get on the housing ladder.
housing affordability
housing affordability
Assumes: House prices rise faster than incomes.
But: Lower mortgage rates also reduce monthly repayments, which partly offsets higher prices.
End
Wealth inequality widens.
Attack the whole chain: QE also protects jobs. By keeping unemployment lower than it would otherwise be, it supports the incomes of lower-paid workers, so income inequality may narrow even as wealth inequality widens.
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Questions this answers
- Assess the impact of quantitative easing on the distribution of wealth.
- Discuss the costs of quantitative easing.
- Evaluate the view that monetary policy has increased inequality in the UK.
Diagram
Lorenz curve for wealth: the curve moves further from the line of equality.
Reverse and related
Quantitative tightening → asset prices fall → wealth gap may narrow.