Macro Musings with David Beckworth cover image

Henry Curr on the Myths and Uncomfortable Truths about QE

Macro Musings with David Beckworth

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The Portfolio Balance Mechanism

Central banks come in to financial markets, they buy assets and the price of those assets goes up. But making that work in a economic theory is quite difficult because acid prices are supposed to be determined by fundamentals not changes in supply and demand. The theoretical motivation for portfolio balance is complex and involved. And it basely relies on the idea that there are these so called preferred habitat investors who really like to hold government bonds. Their demand is inelastic. That creates this opening for the central bank to move government bond yields in a way that isn't anticipated under basic financial theory.

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