Monetary Policy in Balance Sheet Recession

Nomura's Richard Koo is experienced with balance sheet recessions over the lost decade in Japan. He produced this graph which shows the effect of the Fed's QE 2 policy. The monetary base has expanded rapidly as bank reserves have increased by selling treasuries to the Fed in exchange for reserves. The money supply, however, has not increased because the banks have not created money by using their reserves to make more loans. The Fed has kept long term interest rates lower but the major impact has been on the appreciation of stock prices as investors sought higher yields.