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Brown Bag Seminar Quantitative Easing and USS: the impact of large-scale asset purchases on pension schemes

Speaker: Jacob Stevens, University of St Andrews

Abstract: I consider the impact of large-scale asset purchases by central banks (QE) on heterogenous households using two different models. Using a highly detailed Overlapping Generations (OLG) framework, I show that QE is positive for all cohorts but has strong distributional impacts. Young households benefit from rising wages, while older households benefit from increased asset prices which inflate pre-existing pension savings. The largest gains accrue to those nearing retirement, who benefit from both effects. I then build a novel two-agent model of defined-benefit pensions (DPB) based on the USS scheme for academics. I demonstrate that QE is severely harmful to DPB schemes and their members, and this can lead to perverse macroeconomic effects. In my setup, QE artificially inflates the accounting liabilities of DPB schemes and forces increased savings by DPB households to balance the books. This creates a macroeconomically significant convex deflationary effect and sharply diminishing returns to QE. I show that there exists a peak level of QE beyond which further bond purchases are deflationary and unwinding (QT) is inflationary. Future rounds of QE should target private sector assets to avoid the damaging impact on DPB schemes.