...A review of Quantitative easing Student’s Name: Institutional Affiliation: Quantitative Easing: Is it effective? Quantitative easing is an untypical monetary policy adopted by central banks to stimulate the economy and ease liquidity if other methods are ineffective. A steady and low rate of inflation is crucial for a stable and thriving economy. Without a steady rate of inflation, the economy becomes unpredictable, discouraging long-term ventures. Central banks use interest rates to control inflation (Gagnon et al, 2010). They set interest rates at which financial institutions can borrow from them. These rates trickle down to consumers in the end, thus affecting inflation. When inflation declines below a safe level for the economy, say 2 %, this is referred to as deflation. When deflation occurs to the point where there is hardly any inflation, the government may intervene by introducing money directly into the economy to achieve a desired level of inflation. This is what is referred to as quantitative easing (Rothbard, 1999). The central bank does this by buying financial assets from both banks and the private sector, and thus introducing new money into the economy. This paper investigates the efficacy of quantitative easing and its effects to the economy. Typically, central banks stimulate economies by purchasing government bonds to lower short-term interest (Krugman, 2003). However, when the central bank has lowered interest to the point that it is at zero or...
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...------------------------------------------------- Quantitative Easing ------------------------------------------------- Table of Contents Quantitative Easing in general: 2 How the USA Federal Reserve has put QE in practice. 3 QE plan recently approved by the European Central Bank. 4 Likely effects of QE in the Euro Area in relation to the aggregate supply/aggregate demand model and the loanable funds theory 5 Discuss the effects the QE can have on exchange rates. 6 Abstract This paper presents an overview of the policy of Quantitative Easing, used by central banks in an effort to revive the economic system and interrupt a period of economic recession. Quantitative Easing in general In the instance of a crisis such as the one of 2008, Central Banks put monetary and fiscal policies in practice in order to limit the damage to firms and households an maintain a healthy economic environment. The most used and widespread policy used by Central Banks acts upon the interest rates. Lowering interest rates, for example, makes it more convenient for individuals and firms to increase investments rather than save, thereby increasing spending. An increase in investments and spending within the system should, in theory, take the economy out of a recession. However, once the interest rate reaches zero (zero bound ratio) without obtaining any results, CBs must adopt other policies. One of these is the policy of Quantitative Easing; it consists in CBs providing liquidity to...
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...According to the article On Quantitative Easing, the Federal Reserve decided to take the route of Quantitative easing to lower the interest rate and boost the economic growth. In order to fund this buy back, the Fed has the ability to create money. In addition to its previous holding of bonds, the Fed has almost quadrupled its holding to $ 4 trillion which makes Quantitative easing the most massive economic stimulus program in the world. As a result of this QE program, the banks had more lending capability which made the interest rate they charge from borrowers to drop and formed the basis for other rates also. As a result of money supply in the market the value of dollar came down and therefore the investors got attracted to the stock market. On December 18, 2012 the Fed declared that it would cut down its buy back because its economic targets were being met now. This followed Ben Bernanke’s announcement on June 19, 2013 that Fed was considering Tapering which created a panic amongst investors who started selling the bonds and shifted their investment to stocks. In my opinion the course of action taken by the Fed is justified. QE managed to achieve some of its goal. It restored trust in bank and its operation by removing the subprime mortgage from the balance sheet of the bank. It kept interest rates low, thus reviving the real estate market. It promoted economic growth and also stabilized U.S economy. It provided the funds which in turn provided confidence to pull the economy...
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...Explain how the process of quantitative easing in the UK might increase the rate of inflation. (15 marks). Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target. The Central Bank purchases bonds from commercial banks which it turns from an illiquid state to a liquid state by selling it on to increase the money supply. The Fisher equation is where MV=PT, where M is the money supply, so if there is an increase in the money supply this will inevitably lead to inflation to occur, if the money supply is greater than real output. Inflation happens to be the persistent increase in general price levels with the target level of the UK economy being 2% (plus or minus 1%), which is achieved by manipulating interest rates. If the economy is growing at a strong rate and there is an increase in the money supply, then financial institutes may be inclined to lend more or to reducing lending rates. This means that people will happen to borrow more as they are able to borrow more money at a lower interest rate so will be able to pay back the money easier than if there was a high interest rate. This means that consumer confidence will increase as they can see that the economy is stable and they are able to borrow more money than previously at a cheaper rate. As...
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...Submit: QE a showcase of dysfunctional unity? On January 22nd the European central bank’s governing council will take a historic leap towards fighting the continuing deflationary mindset among Europe. However, the long-awaited QE-programme comes with a large dose of compromise among its members. After long drawn discussions ECB is finally making its move towards addressing the very objective it takes more seriously, ie, an inflation target of 2%. And it couldn’t have come any sooner. Last year inflation in the euro zone was negative with a deflationary spiral luring closely behind. By injecting more money into the economy Mario Draghi, ECB’s president, hopes to achieve spurring growth and inflation, much like what the programs have done in America and Britain. But more importantly, Mr. Draghi cannot implement policies on the same terms. Instead of dealing with just one central bank and one federal government, he has to take 19 into consideration. A big-bond buying programme in a monetary union is very problematic, especially due to varying creditworthiness among its member countries, ranging from triple-A for Germany to junk for Greece. But the main issue that has been on the table of discussion is simply risk. Or more precisely, how risk-sharing among the members should be distributed, in case a country defaults on their debt. In other words, who has to open up their wallet the most. The country that especially has been stalling the program is Germany, simply because they...
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...Quantitative Easing Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation. QE1 is a nickname developed to refer to the first round of quantitative easing the Fed launched to promote stronger growth in America post financial crisis of 2008. On November 25, 2008 the Fed announced that it will purchase Government Sponsored Enterprises (GSE) debt of $100 billion and Mortgage-Backed Securities (MBS) of $500 billion. And On March 18, 2009, the size of these purchases were increased to GSE of $200 billion and MBS of $1.25 trillion, respectively. Purchase of $300 billion of longer-term Treasury securities was also announced on March 18, 2009. Qe2 The second program of quantitative easing was first mentioned in a speech given by Federal Reserve Chairman Bernanke in Jackson Hole in August 2010. The Fed officially announced the program on November 3, 2010. The Fed stated that it will purchase $600 billion of longer-term Treasury securities by the end of 2nd quarter of 2011, a pace of about $75 billion per month in order to promote a stronger pace of economic recovery in the United States. The Fed would also use the income from its portfolio of securities for additional purchases bring the...
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...Quantitative Easing is the Federal Reserve buying bonds and assets from financial institutions in order to create a bigger market for these assets. Introducing the “Fed” as a buyer in this market artificially keeps interest rates charged. The goal of quantitative easing is to improve the economy through loans, which are made more accessible by this policy. In turn with more money being loaned, more projects will start leading to jobs and a decrease in the unemployment rate. However, the success of the program has been moderate at best, with unemployment still hovering from 7.5 to 8%. Currently the United States is in its third phase of quantitative easing (“QE”). Some people believe “third times a charm”. Many people believe “QE” is like a drug to the economy. Each time the drug is taken more is required to have the same effect. The future of this program needs to change drastically. The right ideas are there for quantitative easing however the results are not. After implementing QE1 and QE2 and not obtaining the desired results the procedures should be re-evaluated before continuing on to QE3. There are the obvious problems such as inflation and depreciation of the U.S. dollar that are caused by increasing the money supply. These issues could be overlooked if quantitative easing was drastically improving the economy, however it is not. The problem with “giving away” money is the self-interest that people inherently have. Instead of focusing on stimulating the economy, people...
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...QE (Quantitative Easing) La flexibilización cuantitativa (en inglés Quantitative Easing, QE) es una medida de economía pública que consiste en generar moneda y ponerla en circulación. Se utiliza por algunos bancos centrales para aumentar la oferta de dinero, aumentando el exceso de reservas del sistema bancario, generalmente se hace mediante la compra de bonos del propio gobierno central para estabilizar o aumentar sus precios y con ello reducir las tasas de interés a largo plazo. Objetivos: * Bajar los tipos de interés. Se pretende que la rentabilidad de los bonos baje. Como hay una mayor demanda de éstos, su precio sube y la rentabilidad, por tanto, baja. * Creación de liquidez para facilitar el crédito a los consumidores y empresas. Por la compra masiva de bonos estatales y de empresas, estas últimas y en particular los bancos, aumentan sus reservas de liquidez. Se persigue que los bancos abran créditos económicos a sus clientes particulares así como empresas. El efecto global del QE es que el sector no financiero tiene más dinero para invertir y gastar, el sector bancario no sufre una mayor exposición al riesgo, y el Banco Central ha incrementado su balance al comprar los bonos. El QE tiene riesgos, ya que podría provocar un aumento de la inflación si, como apuntan los expertos, se sobreestima la cantidad de alivio necesario y el dinero creado por la compra de activos líquidos. Además, ésta puede dejar de ser eficaz en estimular la demanda si los bancos siguen siendo...
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...QE: Quantitative easing Background: In the end of 2008, there was a rising realization that the global economy is heading for a recession with a large part from a financial meltdown that was sparked in Wall Street by the Credit Default Swap exposure. CDS is a swap designed to transfer the credit exposure of a fixed income product between parties. CDS is also referred to as a credit derivative contract where the purchaser of the swap makes payments up until the maturity date of a contract. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. ACDS is considered an insurance against non-payment. A buyer of a CDS might be speculating there is a possibility that the third party will indeed default. Due to the loans on the mortgage market going bad and many financial institutions buying up lots of CDSs, CDSs sellers were forced to cough up the money to CDS buyers. CDSs sellers such as AIG were on the verge of collapsing and this would have major consequences and banks who had taken on too much financial risk without enough capital such as Northern Rock and RBS who had taken the step of expanding their risk appetite by engaging in trading of CDS and CDOs, with many other banks holding on to bad loans, there was a risk that the financial market would implode and the USA would be mired in a great depression had it not been the MPC (Monetary Policy Committee) who stepped in to use monetary policy to bail out banks and inject liquidity into the...
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...Quantitative Easing and the American Economy: How Saving is Saving Us From Inflation Mark Nasca „12 Colgate University April 30th, 2012 Abstract Following the Great Recession (2007-09), the Federal Reserve (Fed) utilized monetary policy instruments that had never been used in previous economic recoveries. With interest rates near zero, the Fed undertook rounds of quantitative easing (QE), a non-standard policy, in an attempt to stimulate the economy and help bring the nation out of the recession. In this study, the theoretical model presented by Nasca (2011) will be expanded to show that price level can be stabilized when saving and the money supply increase in tandem, all else constant. Following the theoretical discussion, this study will then utilize an intertemporal model with heterogeneous agents to describe the U.S. economy in order to analyze factors affecting consumer saving decisions when QE policies are enacted following an economic crisis. The goal of this model is to show how the saving decision is affected by the enactment of QE in a crisis environment, given the lower prevailing interest rate scenario and elevated levels of economic instability. This study finds that the increase in saving rate observed in the unfavorable rate environment can potentially be attributed to the increased uncertainty in future income expectations and heightened levels of risk aversion that are characteristic of a post-crisis economy. This serves as a theoretical justification for...
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...International Review of Business Research Papers Vol. 8. No.1. January 2012. Pp. 20 - 32 Pricing of Liquidity Risk in Emerging Markets: Evidence from Greater China Kuntonrat Davivongs1 and Pantisa Pavabutr2 This paper used the liquidity adjusted capital asset pricing model of Acharya and Pedersen (2005) to examine the liquidity risk of stocks in two retail-based equity markets, China and Taiwan during the period of 1996-2008. We found that the proportion of liquidity risk overwhelms market risk, unlike the findings in US markets. As a pricing factor, the evidence indicated that systematic liquidity risk was more important than market risk in Taiwan. In China, crosssectional differences in individual firm liquidity explained differences in returns. JEL codes: G12, G15 Key Words: Asset Pricing, Liquidity Risk, Emerging Markets 1. Introduction The diversity of liquidity features and their importance in asset pricing have been an active area of research. The main conclusions drawn from existing works are that there exists commonality in liquidity (Chordia et al., 2000, Huberman and Halka, 2001, Hasbrouck and Seppi, 2001) and that investors demand premium from illiquidity (Amihud and Mendelson, 1986, Brennan and Subrahmanyam, 1996, Datar et al., 1998, Amihud, 2002). What is less understood is the relative importance of market risk to liquidity risk. In an attempt to shed light on this issue, Acharya and Pedersen (2005) used an equilibrium model as a framework to measure...
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...The Rise (and Fall) of the Japanese Yen Lawrence Cifarelli III, Nazanin Ershad, Natthima Sonsoem, Anyesha Mahaptra University of New Haven Abstract This Case study provides an insight to the fluctuations experienced in the currency of Japan, Yen from the late 1990’s to recent years. Japan follows the floating currency monetary policy due to which there is no measures taken on to control the fluctuations. Japan experienced magnificent growth through the 60's, 70's, and 80's leading into the 90's beginning. In the late 1990's, Japan’s economy marked its growth significantly slower, which had then come to be known as the 'lost decade' due to Japanese Asset Price bubble that collapsed. Eventually the nation faced major issues regarding environmental disasters, hollowing out of industries, etc. The past events which have caused the rise and downfall of Japanese Yen has been illustrated for examining the causes of the appreciation and depreciation of this currency. The influence of this floating currency on Japan's economy has been depicted in this case study. This paper also provides some applications of the measures that can maintain the stability of the Japanese Yen. Japan experienced tremendous growth throughout the 1960s, 1970s, and 1980s leading into the leading into the early 1990s. After World War II, Japan underwent a period of restoration followed by the events in 1978 where Japan excelled as a manufacturer partnering with the United States which helped to make its...
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...Learn from Japanese Bubble 1. Easy monetary policy works, but there are risks in the exit. The Federal Reserve’s quantitative easing measures over the past few years have allowed the U.S. economy breathing room to get back on its feet after the worst downturn since the Great Depression. But there are risks that still lurk. If policymakers increase taxes too soon, or if they read the recovery prematurely, they could put the still-tentative U.S. economic recovery in real danger, Goto said. “It’s difficult to measure whether this economic recovery has legs or not,” she said. “In hindsight, the BOJ had misread a lot of the performance of the Japanese economy, and had toyed with the idea of ending that gush of money. What Abenomics has been able to do is to turn back on the spigot,” she said, referring to the current Japanese Prime Minister Shinzo Abe’s plan to breathe life back into Japan. “Japan should have been doing that a lot earlier, so that a comeback could have been easier,” Goto added. “We can learn from that." 2. You can’t divorce financial markets from ‘Main Street’s challenges. Consider what has happened in Japan in recent months. After two decades of subpar performance, the stock market there staged a sharp rally last year, tacking on gains of about 50 percent in roughly 13 months. Japanese stocks took off because of an aggressive round of new easing that was the first part of Abenomics. But what came next was an increase in the consumption tax in an effort to narrow...
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...end of the 20th Century, Japan was officially recognized as an economic superpower throughout the world. However, growth never lasts forever and by the 1990s, Japan’s economy had come to a grinding halt due to a massive collapse in both the real estate and stock markets of the Japanese economy and remains in a recession that has lasted till now. As Japan looked to face another year of stagnant growth of the economy, Japan’s Prime Minister, Shinzo Abe, decided enough was enough. With the assistance of the new governor of the Bank of Japan, Shinzo Abe embarked on a radical economic plan that focused on three arrows of design. The arrows depict the strategy of Shinzo Abe’s “Abenomics” program in which it focuses on fiscal stimulus, monetary easing, and structural reforms. (International Monetary Fund 2013) It is almost near the two year mark since the implementation of Shinzo Abe’s “Abenomics” program has begun. Although typically, economic effects of governmental policies require years to fully see the effects, “Abenomics” was designed as a jumpstart program with future decisions dependent on the immediate aftereffects of implementation. With the initial completion of the first two arrows of the “Abenomics” economic program and the implementation of the third arrow of structural reforms of the Japanese economy, labor, and tax...
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...The Japanese Economy Tanya Savage Pennsylvania College of Health Sciences The Japanese Economy This paper will analyze the economy of Japan including its people, geography and of aspects of the economy. Japan is a country that is located on a Pacific Ocean island on the eastern side of Asia (Gao, 2001). It stretches from Taiwan and East China Sea to the sea of Okhotsk in the north of Japan. Japan has a population of 126 million within its capital city; Tokyo having a population of 30 million, thereby making Japan the tenth most populated country in the globe (Flath, 2005). In total, Japan contains 6,852 islands with four major islands making up 97% of the total land area. This islands include Hokkaido, Shikoku, Honshu, and Kyushu (Alexander,2003). There is no particular official language and the recognized regional languages include Aynu itak, Eastern Japanese, Ryukyuan languages, and Western Japanese (Flath, 2005). The government of Japan is a unitary parliamentary constitutional monarchy, where the emperor is called Akihito and the prime minister is called Shinzo Abe. Japan is the second largest developed country, the third largest economy in the globe in terms of nominal GDP, and fourth largest in terms of purchasing power. In addition, it is the leading creditor nation in the globe (Alexander,2003). Based on these facts, Japan is part of the Group of Eight. Japan has the largest industry of electronics in the globe and also the third largest manufacturing industry of...
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