QUANTITATIVE

EASING

Intensive Course – Fall semester 2014Group 4 - Alexandre, Turtemuulen, Quang Trung Dang

What is QE ?

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective

The central bank is an institution that manages a state’s (or several states’) currency, money supply, and interest rates.

Basically, it describes a form of monetary policy used by central banks to increase the supply of money in an economy when the control bank interest is close to 0.

How does it work? On one side businesses and consumers reduce their spending. On the other side, banks don’t lend money because they are scared they will not get it back. Instead, they buy treasuries because it is a safe way to make money, whereas consumers and businesses are not.

To buy those assets, the central bank has to create money electronically, this money will be then transferred to the bank.

How does it work?

Therefore, by buying those treasuries, the central bank increases their prices and lower their yield…

…Reducing the cost of borrowing for businesses and households, making them more likely to spend.

Bank can also buy directly assets of the companies. This should increases spending to help keeping inflation around the governments’ 2% target.

How does it work?

Therefore, by buying those treasuries, the central bank increases their prices and lower their yield…

…Reducing the cost of borrowing for businesses and households, making them more likely to spend.

Bank can also buy directly assets of the companies. This should increases spending to help keeping inflation around the governments’ 2% target.

History of QE

QE1: December 2008 - June 2010

QE2:.November 2010 - June 2011

Operation Twist (September 2011 - December 2012)

QE3 (September 2012 - October 2014)

QE4 (January 2013 - October 2014)

Did QE work? QE achieved some of its goals:

It removed toxic subprime mortgages from banks. Balance sheets

It also helped to stabilize the U.S. economy, providing the

funds and the confidence to pull out of the recession.

It kept interest rates low enough to revive the housing market.

It did stimulate economic growth, although probably not

as much as the Fed would have liked.

Did QE work? The Fed has been cutting its purchase of Treasury and mortgage-backed securities by $10bn a month at each meeting, from a peak of $85bn.

$25bn in August and September, and a final $15bn tranche in October.

Annual rate of growth in April, May and June to 4.2 percent

The unemployment rate has fallen to 6.2 percent from 8.2 percent two years ago.

Companies are investing, consumers are spending.

The benefits of Quantitative Easing

Quantitative easing can fuel economic growth since money funneled into the economy should allow people to more comfortably make purchases. This can have a trickle down effect on both the consumer and business communities, leading to increased stock market performance and GDP growth.

The benefits of Quantitative Easing

Foster maximum employment

Encourage lending

Encourage borrowing

Increase spending.

Complement low interest rates

The risks of Quantitative Easing

QE cannot simply generate wealth, and the drawbacks and potential risks of even more QE will become greater the more money has been created already. Thereby, QE has several drawbacks worth to consider.

The risks of Quantitative Easing

It drives inflation much higher.

It creates dangers with international trade.

Threat to the money value.

Benefits do not exist QE programs. When the central bank stops printing money, the recovery often gets put on hold, or worse,

begins to reverse.

Encourages debt.

The risks of Quantitative Easing

QE generally leads to short-term benefits with the risk of exacerbating long-term problems. As a result, it is often used as a last resort when the economy faces a great risk of a recession or depression.

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