Quantitative Easing

Topics: Inflation, Monetary policy, Central bank Pages: 11 (3553 words) Published: April 14, 2013
MAF202 Money and Capital Markets – Assignment
Executive Summary
Quantitative easing (QE) is a monetary policy that stimulates economic activeness. QE was first originated in Japan at 2001, afterward, the policy showed its power to influence the economic performance (Kamada &Takagawa, 2005). In 2008, most countries in the world were suffered by Financial Crisis which caused by subprime mortgage. Consequently, the United States and Euro Union implement the first round of QE, in order to recover economic condition.

QE’s function is to increase the liquidity in market, also it can disposal some doubt-debt. At the same time, through these methods, QE can re-establish the credit rating of financial institutions. The result of the last two QEs were quite good, for instance, the unemployment rate in US had decreased. Thus, USA and EU issued the third round of QE, they hope QE3 can further improve economic performance.

Although QE’s performance is positive, but it will also cause some other problems, such as low interest rate and inflation. Therefore, the key point is to balance the financial system.

Task 1
Define Quantitative Easing (QE):
In general, central banks use conventional economic policy, mainly is the adjustment of interest rate to keep the economic stability and to achieve full employment, but when interest rate lower down to close zero. The conventional monetary policies are ineffective. There is only one option for the bank under this circumstance, which is Quantitative Easing (QE), to stimulate the economy’s growth. QE is an unconventional monetary policy and used for expanding the money supply through pumping more money into economy. They do this by purchasing securities, such as government bonds (Mortimer-Lee, 2012). In this case, the Federal Reserve (the Fed) determined to purchase 40 billion of mortgage-backed securities (MBSs) each month and this would not stop until the unemployment rate significantly improved, which is known as the Fed’QE3. Meanwhile, European Central Bank (ECB) also lunched QE3 in form of restarting an unlimited bond buying plan to help the troubled members with their economic.

Similarities and Differences:
Clearly, there are some similarities of QE implemented in both America and European market. First and most significant one is that both countries have made an open-ended promise. To be more specific, there is no time and size limit for this round of intervention provided by both the Fed and the ECB. Second is that they have the same aim for expansion of the money supply, reduce the lending cost and encourage people to spend, thereby increasing the gross demand. It is evidence that there exist several differences between them. The major difference is that the focus of QE3 is quite different. For America, the main purpose of QE is to reduce the unemployment rate and achieve the full employment, while when it comes to ECB; the aim is to safeguard the stability in the European as a whole and to curb the spread of European debt crisis.at to stabilize the market confidence. What is more, their targets are different. The Fed’s MBS purchase program mainly focus on the housing market, however, the ECB is going to buy more short-term government bonds.

Economic and Social Impact
The Fed should realize that the third round of QE would not have much influence on the market and economic, compared with the first two rounds (Cox, CNBC, 2012). Moreover, the most direct impact of the QE3 is to just increase the share price. Another important thing the Fed need to concern about is inflation. The reason for this is that a large amount of money is being created this may cause inflation when these new money begin to flow in the market (Cox, CNBC, 2012). Last, the Fed must concern the real effect of the QE3 to job creation. It is true that little movement in the long-term interest rate can contribute to a little more investment, which would improve jobless rate to some extent....
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