Quantitative easing (QE) is the unconventional monetary policy that central banks apply to stimulate the economy after the ineffective of other conventional monetary policies. Quantitative easing is implemented through the buying of financial assets from private institutions and commercial banks. This will inject predetermined money back into the economy hence increasing the excess reserves in the banks while raising the prices of the bought assets. For the purpose of this paper, qualitative easing will be defined as the large scale purchasing of financial assets in exchange of central bank reserves. Following the 2008, financial crisis qualitative easing became an element of recovery to the central banks that their interest rates were close to zero lower bound or at zero (Benford, Berry, Nikolov, & Young, 2009). With the intensification of the crisis, most international central banks took possible measures in supporting demand and loosening monetary policies.
The bank of England through its monetary policy committee (MPC) dealt with it by cutting interest rates by up to three percentage points in bank rate. In early 2009, the bank further reduced it by one and half percent. MPC in their analysis explained that the cut could not meet the consumer price index of two percent hence need to purchase private and public assets using the central bank money. This led to the introduction of qualitative easing in the United Kingdom economy. The idea behind this was to inject liquid money back into the economy to help boost nominal spending and achieve the two percent inflation target.
[...] During the adjustment phase, the process was continuous until when the price level had risen to sufficient levels of restoring the real output and money balances. From this position, the qualitative easing trough deficient demand was able to accelerate the return of equilibrium in the economy. The implications of Quantitative Easing The first implication was to the savers, the changes in the bank rates and the pushing up of assets price range led to boosted value for wealth hence increase in savings interest. [...]
[...] This happened in the sense that after the bank buying assets, there is an increase in money holdings by the sellers. Money was a perfect substitute of the assets sold, the sellers rebalanced their portfolios through buying of other better assets. The continuous exchange of assets in quest of rebalancing of portfolios by sellers and buyers led to raising of assets prices. The higher assets prices lower borrowing costs and yields hence stimulation of spending leading to aggregate willingness by investors to hold supplies of money and assets (Doh, 2010). [...]
[...] The broader effects of this scheme are in relation to range of assets that can be discerned, but wit difficulties due to the incurred influences and lags involved. The general expectation of quantitative easing is the conventional effects on inflation after affecting output. Finally, in alleviating the economic crisis in United Kingdom the MPC may in the future decide to begin the process of selling back the assets or increasing assets purchases. This might happen because the financial circumstances that led to the economic crisis might change in the future or occur in different magnitude. References Andrés, J. López-Salido, J. [...]
[...] Joyce, M. Lasaosa, M The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking. 7(3).p. 113–61. Joyce, M. & Meldrum, A Market expectations of future Bank Rate. Bank of England Quarterly Bulletin. 48(3). P. 274–82. [...]
[...] The American Economic Review. 94(2) p. 85–90. Cross, M., Fisher, P. & Weeken, O The Bank's balance sheet during the crisis. Bank of England Quarterly Bulletin. 50(1) p. 34–42. Doh, T The efficacy of large-scale asset purchases at the zero lower bound. Economic review. Federal Reserve Bank of Kansas City Economic Review P. 5–34. Eggertsson, G. [...]
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