Return of Inflation and QE

Question 1

Goodhart and Pradhan on Inflation

Answer 1

Covid will mark the dividing line between the deflationary forces of the past 40 years, and the inflationary forces of the next two decades.

Negative supply shocks will result in pent up demand that will be unleashed after restrictions end. This will lead to inflationary pressures

Question 2

Miles and Scott on Inflation

Answer 2

Negative supply and demand shocks. When supply and demand recover following a lifting of restrictions, they will be relatively balanced, and thus limited inflationary pressures.

Question 3

Blanchard on inflation

Answer 3

Low inflation is the most probable, but small possibility of high inflation from the fiscal dominance of monetary policy.

Question 4

Reasons for thinking inflation will remain low

Answer 4

• Commodity, food and oil prices are not putting upward pressure on inflation.
• Labour market, inflation expectations and unemployment are placing no upwards pressure on inflation.

Question 5

Reasons for thinking inflation will rise

Answer 5

• Pent up demand exceeding supply. People could be saving as a result of lockdown and this could cause people to spend more.
• High government debt and financing related to QE.

Question 6

QE impacts on Bank of England Reserves

Answer 6

Central Bank reserves are highly liquid assets, and QE has significantly increased the money supply.

Question 7

Bank of England’s balance sheet

Answer 7

The loan from the BoE to the APF creates reserves (BoE liability) and has significantly expanded the bank’s balance sheet.

Now around £900 billion.

Question 8

QE and Inflation

Answer 8

According to the quantity theory of money, the increase in the money supply bc of QE will be inflationary.
Py = MV, meaning growth in the nominal stock of money will lead to price increases UNLESS there’s negative velocity growth.

QE has linked the central bank and the government, as the Treasury guarantees the reserves.