Mr. Dan O'Brien:

As Stephen has done the plumbing stuff, I am going to ask whether it works. I will not really be looking at Ireland but at the available evidence and the risks associated with it.

Does it really work? As with many things in economics, it is often very difficult to get a consensus. Certainly, there is not much of a consensus in the economics community on whether QE works. There are many reasons for that. One is that there is quite a small evidence base. The first time it was really tried was only this century in Japan. A second reason is that it has most frequently been tried in the post-2008 context when the world has changed and there is a very different environment. It is very difficult to know what effect any policy instrument or lever is having in such changed times. The most difficult aspect is disentangling the different things that happen in an economy. In any day in the world economy, billions upon billions of transactions take place from people paying for taxis or buying loaves of bread to much bigger transactions. There is a huge number of things going on and it is very difficult to disentangle how a button a policy-maker presses in one place will impact on the real economy. In effect, we simply do not have petri dishes whereby we can do QE in one and not in the other and compare the two. It is inherently difficult to say.

However, let us consider the IMF's economists' conclusions. They attempted to assess the impacts of QE and their research, which comes from late in 2013, which is not even two years ago, illustrates very well just how difficult it is to evaluate. When they looked at policies, mostly QE, that try to get beyond the problem of the zero lower band where one can bring interest rates no further, their conclusion was that such policies appeared to have boosted growth and prevented deflation although such effects were considered difficult to measure. Another point they made was that the biggest obstacle to obtaining a clear view of the effects on growth and inflation was establishing the proper counterfactual, that is, the petri dish where one has not tried it. It is difficult because we do not have the petri dishes. Finally, they came to the general conclusion that they thought it had boosted growth and inflation. Anyone who is being honest is going to say, however, that we just do not know.

Let us have a look at some of the evidence. I go back to Japan. Central bankers get very worried when they think prices are going to fall as there is an asymmetry. If prices rise by 100%, which is to say that we get consumer price inflation of 100%, banks know they can increase interest rates to 110% or 120%. They can go all the way to infinity. They have always got some extra fire power if they want to dampen inflation where it spirals upwards and out of control. If prices start falling and spiral downwards, what do they do after they cut interest rates to 0%? As such, there is an asymmetry in the way central banks can deal with inflation and deflation. They have much more power to deal with inflation than deflation. That is why they start getting worried when prices go to zero or below. They feel that if they let that out of control, they will not have the levers to do anything about it.

Let us consider what happened with Japan and its inflation rate, dating back to the time when it started dipping into deflation at the end of the 1990s. During 2000 and 2001 those responsible saw that Japan had fallen into deflation and that the economy had been in a slump for ten years. They decided they needed to act. They had said they would never do quantitative easing, QE, but they decided to do it. Between 2001 and 2006, the five years of QE, the measure was not very successful. There is little of that period when inflation goes above 0%. Prices in Japan over that first period of QE stayed flat or falling. That example is not a strong case of where quantitative easing brought inflation back into the economy at a low level, as desired.

Let us move on to 2013, when Japan tried an even bigger bout of QE. The slide shows that inflation spiked, but it has faded rather quickly. Last October those responsible went even further, and it seems to be having the opposite effect. Prices are falling even further. Certainly in Japan, in terms of generating inflation, the record of QE has not been strong.

Let us move westward and look to the big three economies there, the United States, the eurozone and Britain. What has happened there? Let us consider growth because, ultimately, most of us are more concerned about growth than inflation. Let us consider what has happened to growth in those three economies since 2008. The picture for the US indicates a weak recovery, but we can see that the United States economy is approximately 8% bigger than it was before the crisis. Although it has been a weak recovery, the shape of that recovery is normal. There was a dip into recession and then it moved out of recession. By contrast, the eurozone economy today is still smaller than it was seven years ago. It is unprecedented in living memory to have a smaller economy more than seven years later. Effectively, we have had no growth. The trajectory on the slide indicates that since we bounced a little out of the depths of the recession in 2009, we have had a very weak period with no growth - a second recession. As we know, the eurozone did not implement QE. Let us consider the case of the United Kingdom. It is not by any means conclusive that QE, which started in the depths of the recession, made a major impact on the recovery in the United Kingdom. The recovery in the United Kingdom did not really gain traction until 2013, four years after QE began.

Therefore, although we can say that the US and the UK, which had QE, have had stronger recoveries, and the eurozone, which did not have QE, has had a weak recovery, correlation is not causation. We cannot say definitively in any way that this means QE has been the cause of the difference in performance between the two economies - that is to say, the US and UK on the one hand and the eurozone on the other. We see no real difference in the trend in inflation over the last four years between the eurozone, the UK and the US, despite the operation of QE in the UK and the US.

What are the risks and the downsides? One of the major risks is taking QE away. Do economies become dependent on it? Do financial markets become dependent on it? I understand Dr. Gurdgiev will deal with these questions.

Another question is hyper-inflation, and Dr. Kinsella has dealt with that. There is a concern among some people to the effect that once that approach is taken, a central bank un-anchors inflation expectations. The view is that everyone may believe inflation is going up, people may look for pay rises and it will get out of control. Clearly, that has not happened, and, if anything, we are in a period of extreme low inflation, almost deflation. The measure has not triggered that.

Another major factor, to which Dr. Kinsella has alluded, is asset price inflation. One of the big things we learned from the crisis was that central banks spent too much time looking at consumer price inflation and forgot almost entirely about asset price inflation. In fact, asset price inflation or an asset price bubble can be far worse than a period of high inflation for real economies. An important question is whether we focus enough on asset prices. One of the major criticisms is that QE will exacerbate bubbles in asset prices.

The current slide shows the euro stock market or an aggregate for stocks in the eurozone. We can see clearly that from the beginning of this year, when eurozone QE started, there has been a sharp increase in stock prices. It has come off a little since then for other reasons, perhaps, but there is a clear pushing up of asset prices, which is what the measure is designed to do, in one way, although that is not the ultimate aim. This can have a number of effects, including the creation of new bubbles or spillover effects in other countries - for example, what is going on in China at the moment. There is major panic in China and there has been a collapse in the Chinese stock market. There are fears or some views that there has been some spillover from QE in the Western world to areas outside the Western world, including China. There are also distributional effects, to which Dr. Kinsella has alluded as well.

I agree with Dr. Kinsella's points to the effect that QE has been good for Ireland, mostly through the exchange rate channel. We do more trade with non-euro area countries than almost anyone else. Clearly, a more moderately priced euro relative to our big trading partners, the UK and the US, is good for Irish exporters. It has also had a clear effect on the Government's cost of borrowing and, for Ireland, as a highly indebted country, this has also been good. At this point for Ireland and in the European context it appears that there have been benefits from QE. Given the balance of risks on both sides, I am strongly of the view that QE was a risk well worth taking and one that should have been taken earlier.