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The weak transmission from QE to inflation
The central puzzle of post-2008 monetary policy is the weak observed transmission from quantitative easing to consumer price inflation. QE expands the monetary base through large-scale asset purchases, which conventional theory predicts should be inflationary. As Joyce et al. (2012) demonstrate, however, the transmission was substantially attenuated by the liquidity trap and by banks holding reserves rather than lending. This analysis develops that finding by arguing that the inflationary effect was displaced into asset prices rather than consumer prices, a distinction with significant implications for how the policy is evaluated.