Quantitative Easing
what is quantitative easing? What is the case for a further extension of quantitative easing in the Europe in 2010?
Definition of Quantitative Easing The word, Quantitative" refers that quantity of money is created; "easing" refers to reducing the pressure on banks. The policy of QE is usually implemented when the normal methods like the bank interest rate, discount rate, inter-bank interest rate are very low or close to zero and they hence failed to control the money supply. Hence by QE, the government infuses the financial system with money which results in easing pressure on banks by giving them extra capital. Concept – How does it works and its rationale. During the period of very low inflation, or the presence of deflation, reducing the interest rate further is not enough to maintain the desired level of money supply as required. Lower interest rate encourages people to spend. But when interest rates can go no lower, a central bank 's only option is to pump money into the economy directly. The QE is hence used to infuse the amount of money in the financial system. This is often considered a "last resort" to increase the money supply. The first step is for the bank to "borrow" from the member bank reserve accounts, creating a depository liability. It can then use these funds to buy investments like government bonds from financial firms such as banks, insurance companies and pension funds, in a process known as "monetizing the debt". With more money in their accounts, the banks may decide to lend more to companies and individuals which will in turn increase the amount of activity in the economy. The second channel is through the effect on the cost of borrowing. When the Bank buys bonds, it reduces the supply of those bonds in the economy. That should increase the demand for new bonds and, at the same time, make it cheaper for businesses to borrow. Risk associated with QE. Quantitative easing can trigger higher inflation than desired or even hyperinflation if
Definition of Quantitative Easing The word, Quantitative" refers that quantity of money is created; "easing" refers to reducing the pressure on banks. The policy of QE is usually implemented when the normal methods like the bank interest rate, discount rate, inter-bank interest rate are very low or close to zero and they hence failed to control the money supply. Hence by QE, the government infuses the financial system with money which results in easing pressure on banks by giving them extra capital. Concept – How does it works and its rationale. During the period of very low inflation, or the presence of deflation, reducing the interest rate further is not enough to maintain the desired level of money supply as required. Lower interest rate encourages people to spend. But when interest rates can go no lower, a central bank 's only option is to pump money into the economy directly. The QE is hence used to infuse the amount of money in the financial system. This is often considered a "last resort" to increase the money supply. The first step is for the bank to "borrow" from the member bank reserve accounts, creating a depository liability. It can then use these funds to buy investments like government bonds from financial firms such as banks, insurance companies and pension funds, in a process known as "monetizing the debt". With more money in their accounts, the banks may decide to lend more to companies and individuals which will in turn increase the amount of activity in the economy. The second channel is through the effect on the cost of borrowing. When the Bank buys bonds, it reduces the supply of those bonds in the economy. That should increase the demand for new bonds and, at the same time, make it cheaper for businesses to borrow. Risk associated with QE. Quantitative easing can trigger higher inflation than desired or even hyperinflation if
References: 1)Stratfor,2008 The financial crisis in Europe http://www.stratfor.com/analysis/20081012_financial_crisis_europe 2)Metrolic,2010,Europian cannot withstand another crisis http://www.metrolic.com/european-countries-cannot-withstand-another-financial-crisis143162/ 3)The swedish wire,2010, Noedic countries leading Europe after crisis http://www.swedishwire.com/component/content/article/26:economy/5235:nordiccountries-leading-europe-out-of-crisis 4) Guardian.co.uk,2010,European Debt crisis http://www.guardian.co.uk/business/debt-crisis 5)Finance Metrics,2010, European debt crisis means continent is on the periphery http://www.financemetrics.com/european-debt-crisis-means-continent-is-on-theperiphery/ 6)Los Angeles Times,2010, European countries, IMF offer Greece $146 billion in loans http://articles.latimes.com/2010/may/03/world/la-fg-greece-bailout-20100503 7)The Telegraph,2009, European Central Bank falls into line and embraces quantitative easing http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5292781/EuropeanCentral-Bank-falls-into-line-and-embraces-quantitative-easing.html 8) Wikipedia, http://en.wikipedia.org/wiki/Quantitative_easing 9) Guardian.co.uk, European Central Bank expected to start quantitative easing. http://www.guardian.co.uk/business/2009/apr/02/ecb-europe-quantitative-easing 10)Bloomberg Business,2010, U.S. Quantitative Easing May ‘Backfire,’ Joseph Stiglitz Writes http://www.businessweek.com/news/2010-12-09/u-s- quantitative-easing-may-backfirejoseph-stiglitz-writes.html 11) FXstreet.com,2010, Two Poor Choices: US Quantitative Easing and the European Stabilization Facility http://www.fxstreet.com/fundamental/market-view/market-directions/2010/11/24/ 12)Ezine articles, European Central Banks May Resume Quantitative Easing http://ezinearticles.com/?European-Central-Banks-May-Resume-QuantitativeEasing&id=5352960 13)Moneywatch.com,2010, Quantitative Easing Programs Backed For Europe, U.K. and Japan http://moneywatch.bnet.com/economic-news/blog/macro-view/quantitative-easingprograms-backed-for-europe-uk-and-japan/2677/