The quantitative easing
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A summary of Quantitative easing policy, its first implementation in Japan, then America after the crisis of 2008 and Europe after the Greece sovereign debt crisis.
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The quantitative easing
- 2. Outlines Definition How does it work? Quantitative easing in practice Risks of quantitative easing
- 3. Definition Quantitative easing (QE) refers to macroeconomic intervention that gives magnified liquidity to the market through central bank purchases of mid- to long-term bonds such as national debt securities coupled with increases in the money supply after implementing zero interest rates or similar policies.
- 4. Cont. An ideal way to realize QE policy would be for the Fed to purchase bonds directly, so that financial institutions might obtain a large amount of short-term liquidity from the Fed and then inject it into the real economy via lending to promote economic recovery.
- 5. How does it work? When interest rates approach zero while the economy remains in recession, conventional monetary policies that focus on regulating currency prices are rendered invalid. Therefore, zero interest rate countries such as Japan, America and the European countries have to implement nonconventional QE monetary policies.
- 6. Quantitative easing in practice QE monetary policy was first implemented in Japan. In the late 1990s, after showing slight improvement after years of recession, the Japanese economy was devastated by the East Asian financial crisis as well as by its domestic financial policies. In March 1998, the Bank of Japan announced the implementation of a zero-interest-rate policy; however, the effects were ineffective and not significant enough to stop deflation.
- 7. Cont. Therefore, in March 2001, the Bank of Japan announced its intent to implement QE. In late 2001, the Bank of Japan increased the range of its operations by starting to purchase stock, and at the end of July 2003, it widened the program even further with the purchase of asset-backed commercial paper and asset-backed securities.
- 8. Cont. US experienced the same scenario after 2008 crisis, By the end of 2008, the interest rate was at its lowest level in history, between 0.00 and 0.25 percent, and this zero interest rate policy has continued up to the present. The unemployment rate at that time was as high as 7.4 percent and it kept increasing.
- 9. Cont. Even with a zero interest rate, the Fed was unable to increase employment and control inflation with the usual price-based monetary policy instruments, the Fed had no choice but to turn to a nonconventional quantity-based monetary policy, namely QE. On November 24, 2008, the Fed announced that it would purchase USD 100 billion in bonds issued by Freddie Mac, Fannie Mae and the Federal Home Loan Bank, as well as USD 500 billion in asset- backed securities.
- 10. Risks of quantitative easing The first risk is that QE may not work as, many have argued, was the case in Japan. There is the chance that QE might spur inflation. There are the risks associated with an exit from QE. Since the Fed has no experience unwinding QE, it seems likely they will have a difficult time judging when to exit and how to exit.
- 11. References Yingxi Lu (2013). Quantitative Easing: Reflections on Practice and Theory. World Review of Political Economy, 4(3), 341-356. Paul Mortimer-Lee (2012).The effects and risks of quantitative easing. Journal of Risk Management in Financial Institutions, 5(4), 372389.