Editor's note: This column first appeared on the morning of March 27, 2020. Later that morning, the Bank of Canada cut its policy rate to 0.25 per cent and announced it would buy at least $5 billion a week of Government of Canada bonds in the secondary market, which was quantitative easing in substance. The column was revised in October 2026.
The Bank of Canada should not answer the economic shock created by the pandemic by buying bonds. Rumours say the Bank is considering quantitative easing to stimulate the economy through the pandemic. However, a decade of QE abroad suggests it would get a contested boost to growth in exchange for a policy that is very hard to stop. Canada already has a better model in the targeted liquidity operations it ran in 2008, and the Bank should think repeating the success of the past as opposed to committing to a policy that, to date, has failed to provide compelling evidence for success.
Quantitative easing is the tool central banks reach for when the policy interest rate is already near zero, at what economists call the effective lower bound. The central bank buys large volumes of government bonds, and sometimes private ones, in the secondary market and pays cash. The extra demand raises bond prices and pushes down longer-term yields, which is meant to ease financial conditions and encourage the sellers to spend or lend the proceeds.
The Bank of Japan began QE as a deliberate balance-sheet policy on March 19, 2001, when it shifted its operating target to the current-account balances held at the Bank, aimed for about ¥5 trillion, and said it might increase outright purchases of long-term government bonds as needed. During and after the 2008 financial crisis, the Federal Reserve and the Bank of England ran large-scale asset purchases. The European Central Bank held back at first: its May 2009 covered-bond purchase programme came to about €60 billion in total, and Jean-Claude Trichet told reporters that the bank was “not at all embarking on quantitative easing.” Its large-scale sovereign purchases began only in 2015, under an expanded asset purchase programme of €60 billion a month from March of that year, which rose to €80 billion a month from April 2016.
Whether those programs delivered lasting growth is contested, and Canada is the awkward comparison because it recovered without one. Stephen Williamson, then an economist at the Federal Reserve Bank of St. Louis, compared American and Canadian real GDP after 2007 in a 2017 essay for The Regional Economist:
...there is little difference from 2007 to the fourth quarter of 2016 in real GDP performance in the two countries [Canada and the US]. Indeed, relative to the first quarter of 2007, real GDP in Canada in the fourth quarter of 2016 was 2 percent higher than real GDP in the U.S., reflecting higher cumulative growth, in spite of supposedly less accommodative monetary policy.
The Federal Reserve’s successive purchase programs ran to several trillion dollars, yet on Williamson’s reading Canada matched or outpaced American cumulative growth. Canada’s banking system and commodity exposure differ from those of the United States, which limits the comparison, but the result sits badly with the claim that QE was essential to recovery.
A weak growth tool would be a modest objection on its own. The larger problem is that a central bank that starts buying bonds at scale finds it hard to stop, because investors come to expect heavy official demand and low volatility and react sharply to any sign of withdrawal. When the Federal Reserve merely hinted in 2013 at slowing its purchases, longer-term yields jumped, in the episode Ben Bernanke later called the “taper tantrum”. The ECB’s choice in 2015 and 2016 was to expand its purchases.
QE also changes the incentives of borrowers. By compressing yields and standing ready to buy, it can encourage more issuance, and an OECD report published in February 2020 documented record corporate bond issuance since 2010 alongside declining credit quality. Governments and firms that can refinance cheaply have less reason to stay lean, and politicians learn that large deficits can be absorbed onto a central-bank balance sheet, which invites pressure on the bank’s independence.
Bernanke makes the opposite case in his January 2020 presidential address to the American Economic Association, where he says QE “proved an effective tool for easing financial conditions and providing economic stimulus when short rates are at their lower bound.” He traces the effects to portfolio balance and signalling, notes that studies controlling for expectations still find later purchase rounds powerful, and finds British and euro-area programs had financial-market effects “quantitatively similar” to those in the United States. Simulations on the Fed’s FRB/US model put QE plus forward guidance at roughly three percentage points of extra policy space when the neutral rate is 2 to 3 per cent.
While Bernanke may have a case on financial conditions, easing them is not the same as proving that QE caused durable real growth. Williamson’s comparison demonstrates how Canada recovered without the tool. Above all, stimulus that works by bidding up bond prices is a bet that private investors will put the cash to work at home, and that bet weakens when the domestic outlook is the very reason the central bank reached for QE.
Canada has already shown a narrower path. In September 2008, under Governor Mark Carney, the Bank expanded its swap facility with the Federal Reserve to US$30 billion and announced term purchase and resale agreements against an expanded collateral list that included corporate bonds. Those were liquidity operations aimed at keeping markets functioning, with no standing program of large-scale bond accumulation behind them, and Canada came through that crisis without QE.
The Bank should run the same playbook for the pandemic, lending against broad collateral and finding other targeted ways of getting credit to the sectors that need it, and leave the market for government bonds to private buyers. Any program it announces this spring should carry an end date it can keep. Failure to learn this lesson can put us on the same fraught path our G7 peers have found themselves on.
