Faculty of Management Studies and Research
Aligarh Muslim University
• 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.
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.
US Federal Reserve from 2008-13
• Similar policies have been used by US, UK, & Euro-zone
• 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.
UNITED STATES QE1, QE2, AND QE3
• 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
• In November 2010, the Fed announced a second round of
• Buys $600 billion of Treasury securities by the end of the
second quarter of 2011.
• "QE2" became a ubiquitous nickname in 2010.
• announced on 13 September 2012.
• The Federal Reserve decided to launch a new $40 billion per
• The Federal Open Market Committee (FOMC) announced
that it would likely maintain the federal funds rate near “zero
"at least through 2015.
• 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%
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.
EFFECTS OF QE
Standard of Living
Depreciation of Currency
Investment in Assets
IMPACT OF QE
Impact on Emerging and Developing Economies
• Stimulate demand, maintain trade flows and avoid large-scale
• Revive from economic stagnation, depressed markets and
• QE prop up demands, encouraging banks to expand and
boosting stock valuations.
• 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
• Bank of Japan pumps 1.4 trillion dollars in two years into its
economy aiming 2% inflation rate
IMPACT OF QE
Savings and Pensions
• Low government bond yield rates induced by QE will have
an adverse impact on the underfunding condition of
• Real value of the savings declining
Housing market Over-supply & QE3
• Less recoveries aided in housing market
• Recession caused huge overhang of houses
• 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.
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
• Top 5% own 60% of the nation's individually held financial
Criticism by BRIC Countries
• criticized the QE carried out by the central banks of
• 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.
• 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 .