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Quantitative Easing

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An unconventional monetary policy used by central banks to stimulate the economy.

An unconventional monetary policy used by central banks to stimulate the economy.

Published in Economy & Finance
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  • Lets say there was a prosperous village, where villagers are into agriculture. The village has schools, shops, entertainment, hospitals etc.One day, a well respected pundit arrived in the village. The villagers believed the pundit was blessed with the ability to predict the future.

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  • 1. QUANTITATIVE EASING Atif Ghayas Faculty of Management Studies and Research Aligarh Muslim University Aligarh, U.P
  • 2. QUANTITATIVE EASING • An unconventional monetary policy used by central banks to stimulate the economy. • A process of increasing the money supply by flooding FI’s with capital to promote increased lending & liquidity. • The fund is created electronically, not physically.
  • 3. HISTORY OF QE • Bank of Japan in early 2000’s • 1st used by BOJ to fight Deflation (19 March 2001) • Interest Rate close to ZERO, to promote lending, excess reserve & minimise risk • ↑ Bank Current A/c balance from ¥5 trillion to ¥35 trillion over a four-year period.
  • 4. US Federal Reserve from 2008-13 • Similar policies have been used by US, UK, & Euro-zone nations. • USA Interest rate is federal funds rate. • UK - official bank rate • US Federal Reserve expanded its balance sheet dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions.
  • 5. UNITED STATES QE1, QE2, AND QE3  QE1 • The US Federal Reserve held between $700 billion and $800 billion of Treasury notes • In March 2009, US Fed held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes and reached a peak of $2.1 trillion in June 2010. • The Fed bought $30 billion in two- to ten-year Treasury notes every month.
  • 6.  QE2 • In November 2010, the Fed announced a second round of quantitative easing. • Buys $600 billion of Treasury securities by the end of the second quarter of 2011. • "QE2" became a ubiquitous nickname in 2010.
  • 7.  QE3 • announced on 13 September 2012. • The Federal Reserve decided to launch a new $40 billion per month • The Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near “zero "at least through 2015.
  • 8. • On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month. • Inflation follows a 2% target rate and unemployment decreases to 6.5%
  • 9.  European Central Bank in 2009 • Focus on buying covered bonds, a form of corporate debt • Initial purchases was worth about €60 billion in May 2009. • A total of 12% of its reserves were in foreign equities.  Bank of England in 2009-10 • Bought gilts from FI’s • Cheaper capital to business through securitisation • Purchase £165 billion in assets (Sept 2009) and around £175 billion in assets by end of October 2010.
  • 10. PROCESS OF QE
  • 11. EFFECTS OF QE  Inflation  Standard of Living  Depreciation of Currency  Investment in Assets
  • 12. IMPACT OF QE Impact on Emerging and Developing Economies • Stimulate demand, maintain trade flows and avoid large-scale unemployment. • Revive from economic stagnation, depressed markets and large-scale unemployment. • QE prop up demands, encouraging banks to expand and boosting stock valuations.
  • 13. • Before the crisis, the U.S. held 700 to 800 billion dollars of Treasury notes. The current level is 2.054 trillion dollars. • The European Central Bank (ECB) has pumped 489 billion euro’s of liquidity into the euro-zone since the crisis. • United Kingdom QE has reached the level of 375 billion pounds during crisis. • Bank of Japan pumps 1.4 trillion dollars in two years into its economy aiming 2% inflation rate IMPACT OF QE
  • 14. RISK  Savings and Pensions • Low government bond yield rates induced by QE will have an adverse impact on the underfunding condition of pension funds • Real value of the savings declining  Housing market Over-supply & QE3 • Less recoveries aided in housing market • Recession caused huge overhang of houses
  • 15. CONT.  Capital Fight • The new money could be used by the banks to invest in : i. Emerging Markets ii. Commodity-based economies iii. Commodities themselves iv. Non-local opportunities.
  • 16. CONT.  Increase Income and Wealth Inequality • QE program had boosted the value of stocks and bonds by 26%, or about $970 billion. • About 40% of those gains went to the richest 5% of British households. • Top 5% own 60% of the nation's individually held financial assets
  • 17. CONT.  Criticism by BRIC Countries • criticized the QE carried out by the central banks of developed nations. • Argued that such actions amount to protectionism and competitive devaluation. • net exporters whose currencies are partially pegged to dollar, they protest that QE causes inflation to rise in their countries and penalizes their industries.
  • 18. CONCLUSION • Quantitative easing can be used to help ensure inflation does not fall below target. • Bernanke, prefers to use the term ‘credit easing’. • The aim is to boost spending to keep inflation on track .
  • 19. THANK YOU!