Is the Monetary Transmission Mechanism Broken? Time for People's Quantitative Easing

TL;DR

This paper investigates the disruptions in the monetary transmission mechanism caused by securitization and liquidity traps, evaluates the effectiveness of Quantitative Easing, and proposes a new approach focused on household relief.

Contribution

It introduces a novel form of Quantitative Easing aimed at supporting households rather than banks, addressing weaknesses in traditional QE strategies.

Findings

Securitization reduces interest elasticity.

Liquidity traps occurred during 1954Q3-2019Q3.

Traditional QE has limited impact on economic growth.

Abstract

The monetary transmission channel is disrupted by many factors, especially securitization and liquidity traps. In our study we try to estimate the effect of securitization on the interest elasticity and to identify if a liquidity trap occurred during 1954Q3-2019Q3. The yield curve inversion mechanism shows us that economic cycles are very sensitive to decreasing profitability of banks. However there is no evidence that restoring their profits will ensure a strong recovery. In this regard, we research the low effect of Quantitative Easing (QE) upon economic growth and analyze whether securitization and liquidity traps posed challenges to QE or is it the mainstream theory flawed. In this regard we will examine the main weaknesses of QE, respectively the speculative behavior induced by artificial low rates and its unequal distribution. We propose a new form of QE that will relief households and not reward banks for their risky behavior before recession.