Bias and QE

A new NBER paper argues that there may be conflicts of interest in Central Bank research.

Central Banks are primarily research institutions. They house hundreds of research economists focused on analysing all parts of the economy, but monetary policy in particular. They are the main source of monetary policy research outside academia, and exert significant influence on the monetary policy research done within academia.

As a result, Central Banks are usually in charge of evaluating their own policy decisions, Quantitative Easing in particular.

Some excerpts from the paper:

we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production

while all of the central bank papers report a statistically significant QE effect on output, only half of the academic papers do.

central bank papers use more favorable language in their abstracts: they use more positive adjectives and, to a lesser extent, fewer negative adjectives compared to academic papers

I’m not sure this sounds as compelling as the author’s think it does:

Importantly, we do not argue that central bank research should be discounted. In many ways, central banks are in an excellent position to provide accurate assessments of their own policies. Like pharmaceutical firms studying their own drugs, central banks have superior information about their own products, exceptionally strong expertise in the subject matter, and an intense desire to preserve their reputation

The paper raises the valuable question of whether powerful independent institutions should be in charge of evaluating their own performance. Its a theme I will be returning to over the next few weeks in a longer piece.

Worth reading in full. Please do make sure to read through the methodology section and make sure you find it appropriate and compelling.