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“It is sometimes better to study a balance sheet than it is to believe a model”Rudiger Dornbusch, 1980With the Bank of Japan’s recent “shock and awe” decision to double down on quantitative easing (QE), four of the world’s major central banks – the BOJ, the Fed, the Bank of England and the Swiss National Bank – are now “all in” when it comes to ballooning their balance sheets in correlated, if not coordinated, efforts to achieve escape velocity in their economies. These programs are enormous and untested, and they risk serious unintended consequences even if they ultimately succeed in reflating these economies. QE is controversial, but it’s also not well or widely understood – primarily because there is no agreed upon model for how it works. And theoretical economic models themselves can sometimes get in the way, obfuscating instead of illuminating.
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