The Bank of England is about to announce quantitative measures. The crucial thing to watch for is not the type of asset that the Bank will purchase, whether it will be private sector assets, for example corporate bonds, or public sector ones, for example gilts. Who is selling the asset is much more important. The Bank has so far failed to make a clear distinction and most of the media have got it wrong.
Buying assets from banks merely involves a change in the composition of banks’ assets, exchanging company and government bonds for balances with the Bank; that is, it increases banks’ reserves but not bank deposits. If the assets are purchased from non-banks the sellers receive bank deposits in exchange for their assets and the amount of money in the economy is increased directly. The distinction is very important because the lesson from the 1930s in the US and the last decade in Japan is that in a deep recession boosting bank reserves will not work if monetary growth remains inadequate.
Update 16:25 - The Bank’s News Release just issued (on 5 March) states, “the Bank would also buy medium- and long-maturity conventional gilts in the secondary market”. Such gilts are unlikely to be held by banks because they are too long-dated. The purchases will therefore boost monetary growth providing the seller is a UK resident (if the seller is non-resident, non-resident bank deposits will rise but these are excluded from the definition of the money supply).
Gordon Pepper is the author of Reflections on Monetary Policy: Then and Now.