QE and interest rates

Source: Wall Street Journal

In an August 3 article, the Wall Street Journal made the graph at left.

The US and UK have done a lot of "Quantitative easing," buying up long-term government bonds and mortgage-backed securities, to the end of driving down long-term interest rates. Europe, not so much, and the WSJ article quotes lots of people imploring the ECB to get on the bandwagon.

It's a curious experiment, as standard theory makes a pretty clear prediction about its effects: zero.  OK, then we dream up "frictions," and "segmentation," and "price pressure" or other stories. Empirical work seems to show that the announcement of QE lowers rates a bit.  But those theories only give transitory effects, and there is no correlation between actual purchases and interest rates. (p.2 here for example.)

So back to the graph.

Here is the current US Treasury yield curve, from the really snazzy website provided by the Treasury. (It's nice to get something useful for our tax dollars!)  Yields rise from zero out to 3% at the 30 year horizon.

Here is the same graph from the European Central Bank. I'm too lazy to download the data and put them on the same graph, so you'll have to squint a bit. The US graph compresses the x axis. Overall though, you see Euro rates rising from the same zero to about 2.2%.

Hmm. If massive QE is supposed to lower long rates, why are Europe's long rates a full percentage point below ours?

OK, I admit this isn't serious.  It's got a "thesis topics" label on it for a reason. As always one can bring up other things that are not held constant. The WSJ article mentions the ECB's commitment to "do what it takes," meaning a threat to buy a lot of southern sovereign debt in the future. Though, if all it took was more promises from central bankers -- say to "do what it takes" to keep state pensions afloat -- to lower rates another percentage point, it would be strange that Fed officials haven't provided the needed hot air.

So I'll leave it as a suggestion, or maybe a request to let me know if the paper is already written and I just don't know about it. The large difference in QE across US/UK and EU seems like a fruitful way to measure its effects, and especially to get past announcements and measure its permanent effects. If any.

(Thanks to an anonymous correspondent for pointing out the WSJ graph and making the interest rate point.)

Update

A correspondent put a US and Euro yield cure on the same graph for me. (I only use people's names if they say it's ok. You don't need my hate mail. Thanks though!)