In QE or Not QE, That Is The Question, Krugman says:
OK, some readers have asked me to react to this critique by Mike Kimel. Brief response: Kimel apparently misses the distinction between ordinary monetary policy and quantitative easing, and also misunderstands what the Fed is buying.
The problem is that as soon as you say there are “two kinds of monetary policy” you botch it. And Krugman does so by assuming that the ZLB is binding. In that case you pull out MP2:
Ordinary monetary policy involves cutting short-term rates to fight a slump; it’s not what we’re talking about here, since it’s hard up against the zero lower bound.
QE is an attempt to get traction despite those zero short-term rates by buying long-term debt, hopefully narrowing the spread and thereby boosting the economy. I don’t think it’s had a large effect, but that’s the goal.
As the figure below shows, it´s not that it did not have a “large effect”. Instead of “hopefully narrowing the spread”, it systematically widened it!
QE, despite mumblings to the contrary, was never about reducing long term rates (or the spread). It was about lifting inflation and inflation expectations. Remember that BB is terrified of deflation. So as soon as the danger passed, QE was “discontinued”.
Now, imagine if QE was a strategy associated with a well specified target (say, a nominal GDP level target). If it worked to avoid a “deflationary spiral” it certainly will work to produce a “spending spiral” toward the target. And that´s what you want to happen if the objective is to bring unemployment down and employment and real output up.
For much more detail check out this Scott Sumner post:
I strongly believe that interest rates are the wrong policy instrument. But most people disagree with me. Even when the Fed does QE, they justify it as an action that will reduce long term rates. They seem completely unable to communicate to the public in any non-Keynesian language.