Quantitative Easing (Qe) Research Paper Example
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The Great Recession has been known as the most devastating worldwide economic crisis ever since the Great Depression. It threatened the entire collapse of the world’s large financial institutions. It also affected the housing market, leading to foreclosures, evictions, and prolonged unemployment. As a response to this recession, the central banks around the world used both unconventional and conventional policy measures to loosen the monetary policy and support the demand. Quantitative Easing (QE) was one of the unconventional monetary policy response tools that the United States and United Kingdom used. As the standard monetary policies in the two countries had become ineffective, both the Federal Reserve and Bank of England used Quantitative Easing (QE) to stimulate the economies of their respective countries. For this reason, the present paper explores whether Quantitative Easing has proven to be an effective and appropriate response to the Great Recession in the two countries. The paper also compares and contrasts QE in both countries from 2008 until the present-day.
The Impact of QE Policy on the United States Economy
The 2008 financial crisis was caused by the real estate bubble that burst in 2007. The Federal Reserve responded aggressively by embarking on quantitative easing policy initiative. It introduced Quantitative Easing 1 in 2008, Quantitative Easing 2 in 2010, and the third round of Quantitative Easing in 2012. In an effort to arouse the nation's economy, the Federal Reserve had in three phases used newly created money to buy trillion of dollars in bonds (Irwin, 2014). The Quantitative Easing policy was expected to check the undesirable disinflationary pressures further and help support the economic activity. It is worth noting that the policy initiative have had an economic impact on various sectors in the United States. Although the US economy has not reverted to full employment quickly, QE has had some positive effects.
During the great recession, the United States' rate of unemployment reached double digits (Labonte, 2013). In an effort to decrease the unsustainable debt burdens, households and corporations spent less during the crisis. Consequently, the reduction in spending increased the unemployment rate. The Federal Reserve employed Quantitative Easing in its attempt to sustain employment as asserted by Gros, Alcidi, & Giovannini (2012). As a result, QE policy has increased investment and spending, leading to positive GDP growth. However, although the economy has experienced growth, QE has not been sufficient to restore full employment. The rate of unemployment has remained above the peak level it had reached in the previous recessions. The impact of QE 1 has been ineffective in terms of employment. The growth in revenues is questionable, with unemployment remaining high and private investors remaining in ambiguity about the health of the future economy (Yam, 2010). The policy has not facilitated the creation of enough new jobs.
Quantitative Easing has similarly increased reserves in the commercial banks and other financial institutions. However, the rise in reserves in these financial institutions has not resulted in a significant increase in bank lending. Banks have refused to lend the reserves out. According to Labonte (2013), the total bank lending in the third quarter of 2012 was 5 percent under its pre-crisis peak. Since banks have chosen to hold additional reserves to the Federal Reserve rather than lending them out, there has not been a substantial increase in the supply of money within the economy. The prices, especially for commodities were falling at an alarming rate in early 2009 (Joyce, Miles, Scott, & Vayanos, 2012). As a response, the Federal Reserve employed the QE policy to help stop further decreases in the prices. It is worth noting that QE policy helped arrest the fall in prices of commodities. Consequently, the Federal Reserve has not fully achieved its inflation target of 2 percent. According to Irwin (2014), the Federal Reserve has continuously been unable to get inflation up to its 2% target, with the exception of the occasional brief period.
Quantitative Easing has also had an impact on the domestic and foreign currencies. In essence, QE has decreased the real exchange rate value of the US dollar. For instance, from 2009 to 2011, the real value of the US dollar declined due to the rise in the supply of money in the economy. As a result of the decline in dollar value, the foreign currencies have appreciated. The US dollar devaluation has made exports more competitive. The Quantitative Easing policy has also had an impact on the private sector. According to Carrera, Pérez, & Ramırez-Rondán, (2014), the QE policy in the US increased the liquidity of the private sector. Ideally there has been a sharp upsurge in the Federal Reserve’s balance sheet due to QE policy (Krishnamurthy & Vissing-Jorgensen, 2011). As a result, business and consumer borrowing costs have dropped. The policy has kept the interest rates low for the firms and households, implying that it has impacted the private sector positively. Ideally, the reduction in the cost of borrowing has eased cash flow problems for the businesses. As a result, this has encouraged the retailers in the private sector to invest in new markets.
Conclusively, it is obvious that QE policy has had an impact on the US economy despite its inability to restore the economy fully to full employment. The policy has had an impact on the US financial market with the initial policy, QE1 having a greater impact compared to the subsequent rounds of Quantitative Easing. The policy helped to stabilize the US financial system during the late 2008 and 2009. Consequently, it reduced larger declines in output but has not encouraged the nation’s economic growth. For this reason, Quantitative easing has in some way proved to be an effective and an appropriate response to the Great Recession in the United States.
The Impact of QE Policy on the United Kingdom Economy
The depth of the financial crisis made loosening of the monetary policy necessary (Joyce, Lasaosa, Stevens, & Tong, 2011). In the United Kingdom, Quantitative Easing was introduced in March 2009, originally as a method of supporting the country’s financial system, but most importantly with the goal of increasing aggregate demand. The price level in 2009 was falling in the UK hence it was vital for the UK government to try limit the deflation (Lilico, 2011). The Quantitative Easing policy was focused on purchasing a huge amount of governments bonds to help limit the amount of deflation at the moment. Between March 2009 and January 2010, the purchased assets, overwhelmingly made up of government securities in the United Kingdom amounted to £200 billion, representing about 14 percent of GDP (Joyce, Tong, & Woods, 2011). Apart from authorizing the purchase of government bonds, the UK government also allowed the Bank of England to purchase high-quality corporate bonds and commercial paper.
Just like in the United States, the QE policy has had both positive and negative impacts on the United Kingdom’s economy. Firstly, although QE policy has not increased the economic output of UK as expected, it has facilitated the transmission mechanism between monetary boost to inflation. The policy has primarily increased the country’s growth but as not expected. Kapetanios, Mumtaz, Stevens, & Theodoridis (2012) imply that inflation would have reached low or even negative levels and the real GDP fallen even more in 2009 if the UK did not have a QE program. Ideally, the policy helped in preventing the decline of the country’s GDP and inflation. Kapetanios, Mumtaz, Stevens, & Theodoridis (2012) further state that Quantitative Easing’s peak effect on annual CPI inflation was around 1.24% points while Quantitative Easing’s peak effect on real GDP level was about 1.50 percentage. The asset purchases lower gilt yields, increase broad money holdings and, consecutively, increases a variety of asset prices (Cobham, & Kang, 2012). As a result, this stimulated the expenditure by means of lowering financing costs and increasing wealth in the United Kingdom hence it describes why the GDP level increased. It is worth noting that the asset purchases had economically significant impact. Nevertheless, these positive impacts were not adequate to reverse the numerous negative effects of the UK’s banking crisis.
Bank lending is an imperative part of the money supply. In essence, banks provide investors with loans for the start and expansion of businesses and help in reducing unemployment in a country. For this reason, the absence of bank lending makes the monetary expansionary monetary policy ineffective. Since the Great Recession, the United Kingdom’s Quantitative policy did not focus on bank lending. Consequently, the country’s bank credit has been shrinking. In early 2010, the growth of broad money in UK slowed dramatically falling from about 10 percent a year to below 1 percent a year as Joyce, Lasaosa, Stevens, & Tong (2011) claim. The failure of the UK’s QE to focus on bank lending implies that the policy has not done much in terms of reducing the rate of employment in the country.
The Quantitative Easing also led to distributional issues in the United Kingdom. The policy had an impact on the pensioners and savers through its effect on the annuity rates. The loose monetary policy that has been achieved through QE program, as well as, low-interest rates has had re-distributional effects. It has penalized the retiring and current savers. In addition, QE policy has had an impact on the pensioners. There have been declines in Gilt yields leading to reductions in annuity rates. The annuities rates in the UK determine what one gets from an individual plan. The QE policy has also affected the corporate sector. The UK Gilt yields, which the Quantitative Easing policy offers, have been increasing the pension deficits. As a result, the corporations within the country have been diverting money that they could have used for investment into reinforcing their pension schemes.
In conclusion, quantitative easing has failed to prove its effectiveness and appropriateness to the Great Recession in the United Kingdom. Although it had initially improved the GDP and economic growth of the United Kingdom, it was not the best response to the great recession. According to Edmonds, Webb, & Long (2009), too much Quantitative Easing in the UK, could result in higher inflation in the future whereas too little might do sufficient to boost the economy. The difficulty in judging the extent of the needed QE to stimulate the UK economy to the anticipated effect has made it an ineffective response to the Great Recession within the UK. While it has produced a limited but short-term gain for the United Kingdom’s financial sector, QE has not impacted the business community and citizens struggling with unemployment and inflation positively.
Comparison of Quantitative Easing in UK and US from 2008 until the present-day
The details of the Quantitative Easing programs since 2008 financial crisis in different countries have depended on specific structures of corresponding economies. There have been some Quantitative Easing policies that have been in one way or another similar and others have varied across different central banks. The QE policies in the US and UK since 2008 have been similar in some aspects and different in others. In relation to the similarities, both the Bank of England and Federal Reserve injected reserves into the economies of their respective countries by means of purchasing bonds as ascertained by Fawley & Neely (2013). In addition, since 2008, Quantitative Easing programs have facilitated the recovery of the economies of the two countries, although in an unequal manner. In particular, wage increases in the two countries have been low while corporate profits have primarily been buoyant. Additionally, the rates of inflation in both UK and US are still low. Specifically, Quantitative Easing does not appear to have raised the inflationary expectations in the two countries to any substantial extent.
With reference to the differences, the Fed has used QE policy to purchase private sector assets while the Bank of England has used it to buy government bonds. Since 2008, the Federal Reserve’s asset purchases program has increased its balance sheet from 1 trillion US dollars to more than 4 trillion US dollars. The Fed’s asset purchases have consisted of governments bond and mortgage backed securities. On the other hand, QE in the United Kingdom started in early 2009 and was slowly increased to amount £375bn in total (Breedon, Chadha, & Waters, 2012). The impact of UK’s Quantitative Easing has been impossible to quantify accurately. What’s more, the Bank of England purchased gilts from the financial institutions.
Breedon, F., Chadha, J. S., & Waters, A. (2012). The financial market impact of UK quantitative easing. Oxford Review of Economic Policy, 28(4), 702-728.
Carrera, C., Pérez, F., & Ramırez-Rondán, N. (2014). Effects of the US Quantitative Easing on a Small Open Economy.
Cobham, D., & Kang, Y. (2012). Financial Crisis and Quantitative Easing: Can Broad Money Tell Us Anything? The Manchester School, 80(s1), 54-76.
Edmonds, T., Webb, D., & Long, R. (2009). The economic crisis: policy responses and economic indicators.
Fawley, B. W., & Neely, C. J. (2013). Four stories of quantitative easing. Federal Reserve Bank of St. Louis Review, 95(January/February 2013).
Gros, D., Alcidi, C., & Giovannini, A. (2012). Central banks in times of crisis: The FED vs. the ECB. CEPS Policy briefs, (276).
Irwin, N. (2014, October 29). Quantitative Easing Is Ending. Here’s What It Did, in Charts. The New York Times. Retrieved from http://www.nytimes.com/2014/10/30/upshot/quantitative-easing-is-about-to-end-heres-what-it-did-in-seven-charts.html?_r=0
Joyce, M., Lasaosa, A., Stevens, I., & Tong, M. (2011). The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking, 7(3), 113-161.
Joyce, M., Miles, D., Scott, A., & Vayanos, D. (2012). Quantitative Easing and Unconventional Monetary Policy–an Introduction*. The Economic Journal, 122(564), F271-F288.
Joyce, M., Tong, M., & Woods, R. (2011). The United Kingdom’s quantitative easing policy: design, operation and impact. Bank of England Quarterly Bulletin.
Kapetanios, G., Mumtaz, H., Stevens, I., & Theodoridis, K. (2012). Assessing the Economy‐wide Effects of Quantitative Easing*. The Economic Journal, 122(564), F316-F347.
Krishnamurthy, A., & Vissing-Jorgensen, A. (2011). The effects of quantitative easing on interest rates: channels and implications for policy (No. w17555). National Bureau of Economic Research.
Labonte, M. (2013). Federal Reserve: Unconventional monetary policy options. CRS, USA, 16.
Lilico, A. (2011, October 6). Quantitative easing by the Bank of England: printing more money won’t work this time. The Telegraph. Retrieved from http://www.telegraph.co.uk/finance/financialcrisis/8811210/Quantitative-easing-by-the-Bank-of-England-printing-more-money-wont-work-this-time.html
Yam, Patrick (2010). “Quantitative Easing: A Curse or Blessing?” YAM Media Publications.
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