However, Michala Marcussen at Societe Generale points out that this isn't the whole story. QE, she says, has also led to capital inflows into emerging markets which in turn have increased capital spending in those countries, and this could create excess capacity and an excess supply of goods, which would tend to reduce prices.
So, who's right? What's at issue here is the portfolio rebalancing effect - that is, how investors rejig their portfolios when they get cash from central banks.
At one extreme is the view that they either just sit on the cash, or reinvest it in other safe assets. If this is the case, QE is a mere asset swap, with no macroeconomic effects.
Whilst this might be partially true, we know that it is not the whole story. When Fed chairman Ben Bernanke raised the possibility of reducing QE in May, share prices fell. And when the Fed surprised the markets by not tapering in September, prices rose. Neither move would have happened if QE were merely an asset swap. The fact that QE does affect share prices is evidence that the portfolio rebalancing channel works as central bankers hoped – that QE leads to higher asset prices generally.
However, emerging markets equities and currencies also dived in May. This tells us that investors also rebalance their portfolios towards emerging markets, which is consistent with the Marcussen effect.
So, which channel predominates - the inflationary channel via higher domestic asset prices, or the deflationary channel via increased capital spending in emerging markets? My intuition is that it's the former. This is because: domestic equities should be a closer substitute than emerging market equities for domestic bonds; because the sensitivity of capital spending in (say) China to capital inflows might be slow and imperfect; and because the sensitivity of western inflation to any excess supply in emerging markets is not high, if only because of modest import penetration levels.
This, though, is mere judgment. Is there any evidence for it? Certainly, markets seem to agree with me. In the month after Mr Bernanke raised the possibility of tapering, the five-year US breakeven inflation rate fell as share prices fell - from two to 1.6 percentage points. If the possibility of tapering has disinflationary effects, then QE must be inflationary.
Sadly, though, this isn't conclusive. I've argued that bond markets can be too short-termist. This suggests that their verdict - clear as it seems - might not be wholly reliable.
You might think this just shows that economists don't really know what's happening. Not quite. This uncertainty corroborates a point made by Oxford University's Simon Wren-Lewis - that the effects of monetary policy at the zero bound are especially uncertain. For this reason, sensible attempts to boost economic activity would use methods other than QE.
