QE and QT Effects Shift With State Contingency, UK Study Finds

A new study using 60 years of UK data provides evidence that the effects of quantitative easing (QE) and quantitative tightening (QT) are not uniform over time. The research, by Michael Ellington, Costas Milas, and Ryland Thomas, identifies a bank funding shock that shows the impact of unconventional monetary policies changes significantly across regimes, and those regimes are non-recurrent. For fixed-income investors and policymakers, the finding upends the assumption that past QE responses apply to future rounds.

The Research Finding: Regimes Shift, Not Just Coefficients

The study uses UK public-sector debt sales to the banking system over six decades. It isolates a bank funding shock that captures the transmission of QE and QT. The core result: the responsiveness of government bond yields to a given amount of QE falls over successive rounds. At the same time, demand becomes more responsive to yield changes, while inflation shows more persistence and greater sensitivity to the output gap. These shifts mean the transmission mechanism itself changes, not just the scale of QE.

Transmission Mechanism Changes at Each Stage

The naive interpretation is that QE always works the same way, just with diminishing returns. The better market read is more structural. The yield response weakening suggests the market prices in QE effects faster in later rounds, reducing the marginal impact. Demand becoming more responsive to yields implies that the portfolio rebalancing channel gains relative importance. Inflation showing higher persistence and output-gap sensitivity points to a demand-side amplification that may require tighter policy later. Regimes are non-recurrent, so historical averages do not predict future sensitivity.