Quantitative easing (QE) is an unconventional monetary policy tool used by central banks to stimulate the economy when conventional monetary policy is ineffective. It involves large-scale asset purchases by central banks, primarily government bonds, in order to increase the money supply and lower interest rates. The document discusses the history and implementation of QE by various central banks, including the Federal Reserve, European Central Bank, Bank of Japan, and Bank of England in response to economic crises like the Great Recession. It also analyzes the effects of QE on economies like the United States and Saudi Arabia through lower borrowing costs, higher asset prices, and increased economic activity.

1. Prepared by :
Naif Awad Baghlaf
MBA(finance)CME1,CME3 , Member of the Saudi Economic
Association , Member of Saudi Authority for Accredited
Valuers (TAQEEM) Prepared by Nayef Awad Baghaf

2.  QE: is a unconventional monetary policy tool ,
used by central banks when the conventional
monetary policy become ineffective.
 In more detail QE is an (open market operation)
used by central banks in abnormal times such as
(Depression).
 The main aim of QE is to increase the money
supply and in turn decreasing interest rates and
make borrowing cheaper to household and
business ,in environment where interest rate are
near zero levels.
 In very simple way QE is assets swap (bond for
reserve).
Prepared by Nayef Awad Baghaf

3. Prepared by Nayef Awad Baghaf

4.  in 1719 France faced a debt was more than 20 times greater
than its tax revenue, To solve the problem without cutting
spending, France introduced paper money and converted
the debt into amounts that could be repaid with pieces of
paper instead of gold.(known as the Mississippi bubble
crises) .
 in 1920 after the WW1 Germany started to print money to
pay there obligations and debt to other nations after the
unfair Treaty of Versailles(nations who own the WW1), to
pay its massive amount of liabilities they started to print
massive amount of money , the money supply increased so
rapidly and the currency quickly started to depreciate and
the consumers had to offer up more and more notes for
every day goods. in 1922 hyperinflation kicked in .Prepared by Nayef Awad Baghaf

5.  QE was first used by the bank of Japan On March 19, 2001 to face the
deflation.
 QE1was used by the Feral reserve first in the 16th of December 2008,
then QE2 in November the 4th 2010, QE3 started at 13th of
September 2012, though Operation twist was conducted in 2011 to
enhance the effect of QE(Housing market).
 ECB first used QE in march 2009 .
 Bank of England started its QE in march 2009.
Prepared by Nayef Awad Baghaf

6. Program
Date
implemente
d Description Program Size
Balance Sheet
Impact
TARP 28/10/2008Treasury purchases or insures troubled
assets that are based on residential or
commercial
$475 Bln $475 Bln
TALF 03/03/2009Fed program to support asset-backed
securities. Funds lent to holders of certain
AAA-rated ABS.
$1Tln $1Tln
QE1 16/12/2008Fed purchases financial asset to inject
money into the economy.
$600 Bln $600 Bln
QE2 04/11/2010Fed bought 2-10 Treasury notes, to lower
long-term interest rates.
$600 Bln $600 Bln
Operation Twist 23/09/2011Fed looks to sell Treasuries with shorter
maturities and purchase equivalent
longer- term debt.
$400 Bln $0
QE3 13/9/2012Fed bought more of MBS started 40 Bln a month extended to
85bil a month
Prepared by Nayef Awad Baghaf

7. 1-When interest rates reach near zero levels further
redaction in interest will have little effect on the
money demand .(elasticity of demand).
2-The unique structure of the 2008 crisis (it’s a
depression caused by the financial sector) helping to
regain trust in the financial system and increasing
the solvency of the whole system by pumping
liquidity and altering the mix of assets (Toxic assess)
in the financial institutions balance sheets ,making
lending to those institutions safer and more
desirable .
3-Furhtere reeducation in interbank rates to reduce the
cost of borrowing , or in further details the discount
rate needed by investors and lenders for example
(WACC).
Prepared by Nayef Awad Baghaf

8. 4-Huosing market plays an important role in the economics
growth and to catalyze demand on the housing market
mortgagee rates have to be low ,making the process of
owning a house cheaper for families.(operation twist was
launched specially to push interest rates on mortgages lower).
5-QE increase the value of assets (stocks ,bonds ,gold etc.) which
in turn creates felt of wealth for business and families who
hold those investments in there portfolio, this will lead to
higher spending and increase the Aggregate demand in the
economy with higher economic growth.
6-increaing demand for bonds (T-bills, gilts etc) and MBS
generates a further pressures on the Yields curve of those
instruments.
7-Quntitive easing encourage bank to lend there excess reserve
because excess reserve earns less interest than the required
reserve they held with Federal reserve.(same thing is applied
with other central banks)
Prepared by Nayef Awad Baghaf

9. Prepared by Nayef Awad Baghaf

10. Prepared by Nayef Awad Baghaf

11. QE is just like any open market operation conducted
by the feds. Open market operation involve buying
and selling bonds to alter the banks reserve and
eventually the money supply.
How they do it :
1-The federal open market committee (FOMC) agrees
on the amount of assets purchased and the component
of those purchases .
2-The federal reserve start purchase assets such as
treasuries bonds ,MOB, and ABS through primary
dealers (JPMorgan , Barclays Capital Inc. etc ) and
exchange those assets with electronic entry or
electronic credit (fed could create this entry out of thin
air).
Prepared by Nayef Awad Baghaf

12.  Federal Reserve balance sheet:
 Change in Assets = +$100
Change in Liabilities = +$100
Change in Net Worth = $0
 Banks balance sheet:
 Change in Assets = $0 (t-bond is swapped for
reserves)
Change in Liabilities = $0
Change in Net Worth = $0
Prepared by Nayef Awad Baghaf

13. Prepared by Nayef Awad Baghaf

14. Prepared by Nayef Awad Baghaf

15. Central bank Operations Targeted to
Federal Reserve
1-The federal reserve called his operation credit
easing , credit easing is different in its way of
altering the assets composition banks has in their
balance sheet ,instead of just targeting reserve
levels.
2-Operation twist, which is designed to affect the
price of 10- YR treasuries, which has a correlation
with the 30 year mortgage interest rates.
3-More of money supply target instead of just
federal fund target, also focused more on long
term treasuries rather than the short term in
conventional market operation.
1-The financial crisis. (subprime mortgages)
2-Low economic growth.
3-The housing market.
European Central Bank
1-The European center bank called its program
(Outright Monetary Transactions) where the ECB
purchase sovereign bonds form the secondary
market specially 1-3 years notes to but downward
pressure on the Yield curve make it cheaper for
those countries to borrow.
2-The European central bank lunched its second
program in 2012 called it (securities market
program) this time the program was with no limit
boundaries to by bonds.
3- European central bank used "Sterilization" to
keep liquidity from pushing inflations rates
higher.
1-Sovigne debt problems.
2-The discrete interest rates on different countries
though they are all using the same currency.
3-Low economic growth.
4-Subprime mortgages especially Spain.
5-PIGS countries where the most concern in Europe.
Prepared by Nayef Awad Baghaf

16. Central bank Operations Targeted to
Bank of England
Quantitative easing in England is more of
buying the government bonds (Gilt) and
some of corporate high-quality bonds.
1-Low economic growth.
2-Subprime mortgages.
Bank of Japan
1-First country to implement quantitative
easing before the finical crises in 2001.
2-Japanese quantitative easing focused
more on the banks reserve, Though in the
second quantitative easing the bank of
Japan purchased governmental bonds and
MBS.
1-facing the deflation in the Japanese
economy after the Japanese assets price
bubble or what sometimes refer to as the
lost decade.
2-Facing economic slowdown and
subprime mortgages.
Prepared by Nayef Awad Baghaf

17.  Governmental debt is not necessarily a bad thing ,
governments could have a deficit or surplus in
there budget and still borrow from the public or
banks .
 some times governments represented in the
department of Treasuries in US, or minster of
Finance in Saudi Arabia, issues bonds with no
deficit in there budget as a part of there Fiscal
policy , either to observe liquidity effecting the
money supply or taking advantage of low interest
rates.
Prepared by Nayef Awad Baghaf

18.  Since 2008 the American debt increased from 9.9
trillion to 16.7 trillion in 2013 (estimated).
 The American debt after the financial crises been
used to finance the deficit the government has to
implement the high spending plan following
Keynesian economics method of catalyzing the
demand side(total demand in economy) in
depression time.
 Quantitative easing helped to decrease the interest
rates make it cheaper for the US (treasury
department) to borrow at national or international
levels.
Prepared by Nayef Awad Baghaf

19. Prepared by Nayef Awad Baghaf

20.  The greater money supply forced the value of
dollar to decrease against other currencies and
made US investments and goods cheaper for
foreign investors and helped in increasing the
flow of capital to the united state ,this flow of
capital ,helped to increase the value of assets(look
the S&P500 , gold . oil etc.) in the united state and
also helped indirectly to finance there deficit
through huge purchases made by forging
countries such as china, Japan and GCC countries
to buy treasuries bond .
Prepared by Nayef Awad Baghaf

21. Prepared by Nayef Awad Baghaf

22. Prepared by Nayef Awad Baghaf

23. The value of the Saudi currency has been effected by
the financial crisis and the following Quantitative easing
in 2009.
Since the Saudi currency is pegged to the Dollar and
value of Dollar has declined against major currencies a
decline the purchasing power of the Saudi Riyal was
Inevitable.
A decline in the Saudi currency value means business
needed more Saudi Riyals to buy the same amount of
goods and services from other nations or business which
use other currencies such as the Euro , sterling pound
and Swiss Franc.
 This higher cost meant consumers also have to pay
more for there goods and services.
Prepared by Nayef Awad Baghaf

24. Prepared by Nayef Awad Baghaf

25. Prepared by Nayef Awad Baghaf

26.  QE has its impact on oil prices as well (as been
shown by previous chart) this helped to increase the
prices of oil and increase the revenue in the
governmental budget .
 Higher oil prices helped to increase the local
spending to different governmental projects helping
to keep the economy form fallen to recession.
 Oil prices helped to increase the Total reserve., This
reserve worked as way to backup the economics
growth in Saudi Arabia, reserve also lead to enhance
to Saudi government credit rating and thus decrease
the cost of borrowing, Helped the government to
borrow at relatively low interest rate.
Prepared by Nayef Awad Baghaf

27. Prepared by Nayef Awad Baghaf

28.  The Saudi stock index ( TASI), doesn’t show
increasing in value caused by QE. Though its very
evident that some of the companies specially
petrochemical companies had benefitted from the
decreasing value of Saudi Riyal , which made
there products more attractive to other countries
and lead to higher sales inform of exports.
 The low interest rates helped companies to lower
there cost of capital in other words there (WACC)
and led to more growth in economic activity.
Prepared by Nayef Awad Baghaf

29.  The fallen value of dollar lead to the decrease in the
Saudi riyal purchasing power(amount of goods and
services one Riyal can buy) helped to increase the
prices of real estate.
 Fallen interest rate helped the liquidity to find it
place to the Real estate market(assets classes with
higher returns) increasing demand (demand for real
estate as investment channel and speculation)
 Low interest rate helped to reduce the opportunity
cost of between real estate investment and other kind
of investment and lead to higher demand and prices.
Prepared by Nayef Awad Baghaf

30. Prepared by Nayef Awad Baghaf