<p>It was not the ultimate goal of central banks but it was certainly an intermediate goal.</p>
<ol>
<li><p>First, it is well known fact that during recessions money stock tends to fall. Following the stylized facts presented Romer (2014), in between 1959 and 2009, <em>on average during recessions</em>, real money stock (M-2/GDP deflator) contracted by -0.5% (and this was despite that Fed, like most other central banks, generally tries to pursue <em>expansionary</em> monetary policy in recessions).</p>
<p>The money supply did not contract in every recession though, but this is mainly because Fed generally does not want money supply to contract during recessions which would cause deflation (and that would exacerbate the shock - Great Depression was Great because of the money supply contraction in the US - See discussion in Friedman &amp; Schwartz Monetary History of the US).</p>
<p>Now again, money supply does not necessarily have to fall in <em>all</em> recessions, but it is likely to contract without central bank intervention during recession (saying so is not controversial).</p>
</li>
<li><p>Quantitative Easing was done not just to prevent decrease but also further increase the money supply. In fact QE is just a variation on the open market operations that central bank traditionally use (besides interest rates) to expand money supply (see Mankiw Macroeconomics pp 96).</p>
<p>However, you should note that ultimate goal of central banks is not to increase money supply (that is just tool), but rather to increase inflation/prevent deflation and to ultimately stimulate the economy (many central banks have mandate to either keep prices stable - but this is usually defined as some level of small inflation like 2% p.a., and/or to maintain full employment - which is done by expanding money supply during recessions).</p>
</li>
</ol>

CC BY-SA 4.0
2021-08-22T06:56:22.827Z
What is the title of the Romer 2014 paper?
Mick
CC BY-SA 4.0
2021-08-22T07:20:01.593Z
@Mick oh sorry I forgot to add that, it’s not paper but it is a textbook Advanced Macroeconomics, Romer discusses some stylized facts in chapter on business cycles
1muflon1
CC BY-SA 4.0
2021-08-22T08:49:23.703Z
Thanks.. but sadly I don't have that textbook. So you are saying that preventing a fall is an "intermediate goal". What I am after is a paper or article which unequivocally and directly states that at least part of the motivation for QE is preventing a fall in the money supply. Or, failing that, at least states that without QE we would expect the money supply to fall. Does the Romer chapter do that?
Mick
CC BY-SA 4.0
2021-08-22T09:01:39.943Z
@Mick 1. well but I quoted the relevant statistics for you and you can always borrow the textbook from library. Btw this is well known fact in economics if you have other macro textbook you should be able to find it there 2. But you linked video not a paper and in that video they just say it’s their goal but not that it is their ultimate goal, for example if I exercise I will set some goal like to do 50 pushups, but it’s not like I care about doing 50 push-ups I just want to be healthy. I don’t see any indication in that video that they would be claiming that they did it
1muflon1
CC BY-SA 4.0
2021-08-22T09:08:54.527Z
For the sake of increasing money supply and nothing else, even in the video the person says they wish to increase lending to real economy which is channel for increasing inflation and stimulating output, to be completely honest from that 2 min video I am not even sure if they talk about contraction of money supply or output because the sentence would work with both of them. To take this and claim that this is some sort of proclamation that **ultimate** goal of QE was to prevent money supply decrease and not manage business cycle would be extremely uncharitable interpretation
1muflon1
CC BY-SA 4.0
2021-08-22T09:15:31.610Z
@Mick also going once more to the money supply, you can see that it should decrease in recession just from basic money market model. NK money market equilibrium is given by $$M/P=L(Y,i)$$ where M/P is the real money stock (also referenced in my answer) and L is demand for money which decreases in the recession since it varies inversely with real output $Y$, so unless CB does something like slashing $i$ or expanding $M$, M/P will fall. You can find this in literately any 101 macro textbook it is part of the IS LM model, if you google IS LM there will be some notes online for sure as well
1muflon1
CC BY-SA 4.0
2021-08-22T09:41:55.383Z
@Mick oh sorry I think I misunderstood the sentence (English is my second language I thought you referenced some paper you read), if you just look for any paper that just mentions that money supply falls during recessions then here is a random example: https://www.elgaronline.com/view/journals/ejeep/10-2/ejeep.2013.02.01.xml the paper promotes fiscal policy thought in order to prevent money supply decline, but there was at that time controversy whether monetary policy can work at ZLB. But you could pull up any modern macro general equilibrium model and see that from the eq
1muflon1
CC BY-SA 4.0
2021-08-22T09:55:41.640Z
Ah yes, Richard Koo - he's a good guy. That's the perfect answer.
Mick
CC BY-SA 4.0
2021-08-21T21:57:56.183Z
2021-08-22T07:39:07.360Z
2021-08-22T07:39:07.360Z
1muflon1
<p>It appears to me that QE has been employed after the collapse of housing bubbles - both in Japan in the early nineties and in many other countries around 2008. During a housing bubble there is a high rate of borrowing and when the bubble collapses the rate of borrowing will reduce dramatically and so (in the absence of any central bank intervention) the money supply will start to fall as existing mortgage principal repayments extinguish previously lent out credit... I once saw a <a href="https://www.bbc.co.uk/news/av/business-15446545" rel="nofollow noreferrer">video of the former governor of the Bank of England</a> say words to the effect that QE was being used to compensate for this fall but the publishing of this notion seems to be rare as hens teeth. I have never come across an article that concurs with this idea. Indeed you can read many many descriptions of QE (<a href="https://en.wikipedia.org/wiki/Quantitative_easing" rel="nofollow noreferrer">including Wikipedia</a>) that make no mention whatsoever of the idea of money being extinguished by the repayment of loans or that the money supply might fall without QE.</p>
<p>So either:</p>
<ul>
<li>I have just been reading the wrong articles</li>
</ul>
<p>or</p>
<ul>
<li>QE is unrelated to any potential fall in the money supply in the absence of intervention</li>
</ul>

<money-supply><central-banking><quantitative-easing>
Any support for the idea that QE is employed to prevent the money supply from contracting
Mick
# Any support for the idea that QE is employed to prevent the money supply from contracting

(Asked by: username_0 on 2021-08-21)

It appears to me that QE has been employed after the collapse of housing bubbles - both in Japan in the early nineties and in many other countries around 2008. During a housing bubble there is a high rate of borrowing and when the bubble collapses the rate of borrowing will reduce dramatically and so (in the absence of any central bank intervention) the money supply will start to fall as existing mortgage principal repayments extinguish previously lent out credit... I once saw a [video of the former governor of the Bank of England](https://www.bbc.co.uk/news/av/business-15446545) say words to the effect that QE was being used to compensate for this fall but the publishing of this notion seems to be rare as hens teeth. I have never come across an article that concurs with this idea. Indeed you can read many many descriptions of QE ([including Wikipedia](https://en.wikipedia.org/wiki/Quantitative_easing)) that make no mention whatsoever of the idea of money being extinguished by the repayment of loans or that the money supply might fall without QE.

So either:

* I have just been reading the wrong articles

or

* QE is unrelated to any potential fall in the money supply in the absence of intervention

**Tags:** money-supply, central-banking, quantitative-easing

---

## 1 answers

### Answer by username_1 on 2021-08-21. Score: 1 | Accepted answer

It was not the ultimate goal of central banks but it was certainly an intermediate goal.

1. First, it is well known fact that during recessions money stock tends to fall. Following the stylized facts presented Romer (2014), in between 1959 and 2009, *on average during recessions*, real money stock (M-2/GDP deflator) contracted by -0.5% (and this was despite that Fed, like most other central banks, generally tries to pursue *expansionary* monetary policy in recessions).

   The money supply did not contract in every recession though, but this is mainly because Fed generally does not want money supply to contract during recessions which would cause deflation (and that would exacerbate the shock - Great Depression was Great because of the money supply contraction in the US - See discussion in Friedman & Schwartz Monetary History of the US).

   Now again, money supply does not necessarily have to fall in *all* recessions, but it is likely to contract without central bank intervention during recession (saying so is not controversial).
2. Quantitative Easing was done not just to prevent decrease but also further increase the money supply. In fact QE is just a variation on the open market operations that central bank traditionally use (besides interest rates) to expand money supply (see Mankiw Macroeconomics pp 96).

   However, you should note that ultimate goal of central banks is not to increase money supply (that is just tool), but rather to increase inflation/prevent deflation and to ultimately stimulate the economy (many central banks have mandate to either keep prices stable - but this is usually defined as some level of small inflation like 2% p.a., and/or to maintain full employment - which is done by expanding money supply during recessions).

> **Comments:**
> **username_0**: What is the title of the Romer 2014 paper?  
> **username_1**: @Mick oh sorry I forgot to add that, it’s not paper but it is a textbook Advanced Macroeconomics, Romer discusses some stylized facts in chapter on business cycles  
> **username_0**: Thanks.. but sadly I don't have that textbook. So you are saying that preventing a fall is an "intermediate goal". What I am after is a paper or article which unequivocally and directly states that at least part of the motivation for QE is preventing a fall in the money supply. Or, failing that, at least states that without QE we would expect the money supply to fall. Does the Romer chapter do that?  
> **username_1**: @Mick 1. well but I quoted the relevant statistics for you and you can always borrow the textbook from library. Btw this is well known fact in economics if you have other macro textbook you should be able to find it there 2. But you linked video not a paper and in that video they just say it’s their goal but not that it is their ultimate goal, for example if I exercise I will set some goal like to do 50 pushups, but it’s not like I care about doing 50 push-ups I just want to be healthy. I don’t see any indication in that video that they would be claiming that they did it  
> **username_1**: For the sake of increasing money supply and nothing else, even in the video the person says they wish to increase lending to real economy which is channel for increasing inflation and stimulating output, to be completely honest from that 2 min video I am not even sure if they talk about contraction of money supply or output because the sentence would work with both of them. To take this and claim that this is some sort of proclamation that **ultimate** goal of QE was to prevent money supply decrease and not manage business cycle would be extremely uncharitable interpretation  
> **username_1**: @Mick also going once more to the money supply, you can see that it should decrease in recession just from basic money market model. NK money market equilibrium is given by $$M/P=L(Y,i)$$ where M/P is the real money stock (also referenced in my answer) and L is demand for money which decreases in the recession since it varies inversely with real output $Y$, so unless CB does something like slashing $i$ or expanding $M$, M/P will fall. You can find this in literately any 101 macro textbook it is part of the IS LM model, if you google IS LM there will be some notes online for sure as well  
> **username_1**: @Mick oh sorry I think I misunderstood the sentence (English is my second language I thought you referenced some paper you read), if you just look for any paper that just mentions that money supply falls during recessions then here is a random example: https://www.elgaronline.com/view/journals/ejeep/10-2/ejeep.2013.02.01.xml the paper promotes fiscal policy thought in order to prevent money supply decline, but there was at that time controversy whether monetary policy can work at ZLB. But you could pull up any modern macro general equilibrium model and see that from the eq  
> **username_0**: Ah yes, Richard Koo - he's a good guy. That's the perfect answer.  

---

