Any support for the idea that QE is employed to prevent the money supply from contracting

Question

It appears to me that QE has been employed after the collapse of housing bubbles - both in Japan in the early nineties and in many other countries around 2008. During a housing bubble there is a high rate of borrowing and when the bubble collapses the rate of borrowing will reduce dramatically and so (in the absence of any central bank intervention) the money supply will start to fall as existing mortgage principal repayments extinguish previously lent out credit... I once saw a video of the former governor of the Bank of England say words to the effect that QE was being used to compensate for this fall but the publishing of this notion seems to be rare as hens teeth. I have never come across an article that concurs with this idea. Indeed you can read many many descriptions of QE (including Wikipedia) that make no mention whatsoever of the idea of money being extinguished by the repayment of loans or that the money supply might fall without QE.

So either:

• I have just been reading the wrong articles

or

• QE is unrelated to any potential fall in the money supply in the absence of intervention

Answer 1

It was not the ultimate goal of central banks but it was certainly an intermediate goal.

1. First, it is well known fact that during recessions money stock tends to fall. Following the stylized facts presented Romer (2014), in between 1959 and 2009, on average during recessions, real money stock (M-2/GDP deflator) contracted by -0.5% (and this was despite that Fed, like most other central banks, generally tries to pursue expansionary monetary policy in recessions).

   The money supply did not contract in every recession though, but this is mainly because Fed generally does not want money supply to contract during recessions which would cause deflation (and that would exacerbate the shock - Great Depression was Great because of the money supply contraction in the US - See discussion in Friedman & Schwartz Monetary History of the US).

   Now again, money supply does not necessarily have to fall in all recessions, but it is likely to contract without central bank intervention during recession (saying so is not controversial).

2. Quantitative Easing was done not just to prevent decrease but also further increase the money supply. In fact QE is just a variation on the open market operations that central bank traditionally use (besides interest rates) to expand money supply (see Mankiw Macroeconomics pp 96).

   However, you should note that ultimate goal of central banks is not to increase money supply (that is just tool), but rather to increase inflation/prevent deflation and to ultimately stimulate the economy (many central banks have mandate to either keep prices stable - but this is usually defined as some level of small inflation like 2% p.a., and/or to maintain full employment - which is done by expanding money supply during recessions).