Does QE necessarily lead to inflation?
Introduction
INTRODUCTION: Since the insolvency of Lehman Brothers the whole world faced “the worst global recession since 1930s' crisis”(Former Fed Chairman, 2009) and a huge “liquidity trap” (Krugman, 1998), when nominal rates reach lower zero bound. Even historically low short-run interest rates could not help the economy to recover. Due to this relatively new monetary policy became more popular – quantitative easing, also known as QE. “QE refers change the size of central bank's balance sheet in order to ease liquidity”(Alan S.Blinder, Quantiative Easing: Entrance and Exit Strategies, p.1, 2010). However, some people refer to this policy as simply “printing money” or “the helicopter money” (Milton Friedman), and argue that QE necessarily ends in inflation. Therefore, firstly it is necessary to show show the difference between “printing money” and QE policy. Finally, combining different economics theories (Monetarist and Keynesian) and QE policy's assumptions this essay will show that in the short-run QE does bring inflation. But in the long-run it may and even unsustainable one if the central banks use wrong “exit strategies” (explained later on).
FIRST PARAGRAPH: First of all, it is necessary to define and explain what is quantitative easing. It is a relatively new monetary policy which was first introduced in Japan in 2001-2006. It is used when extremely low interest rates can not help. In Japan's case interest rates reached 0% and the central bank could not have gone any further to negative interest rates (even though some countries did this).So that more money could be circulated in the economy, when historically low interest rates can not help. Consequently, BoJ (Bank of Japan) used QE in order to increase central bank's balance sheet and make commercial banks lend money to businesses. In details this is done by purchasing assets (mostly government bonds or securities) from the banks by using “new money” (which are created electronically). By
INTRODUCTION: Since the insolvency of Lehman Brothers the whole world faced “the worst global recession since 1930s' crisis”(Former Fed Chairman, 2009) and a huge “liquidity trap” (Krugman, 1998), when nominal rates reach lower zero bound. Even historically low short-run interest rates could not help the economy to recover. Due to this relatively new monetary policy became more popular – quantitative easing, also known as QE. “QE refers change the size of central bank's balance sheet in order to ease liquidity”(Alan S.Blinder, Quantiative Easing: Entrance and Exit Strategies, p.1, 2010). However, some people refer to this policy as simply “printing money” or “the helicopter money” (Milton Friedman), and argue that QE necessarily ends in inflation. Therefore, firstly it is necessary to show show the difference between “printing money” and QE policy. Finally, combining different economics theories (Monetarist and Keynesian) and QE policy's assumptions this essay will show that in the short-run QE does bring inflation. But in the long-run it may and even unsustainable one if the central banks use wrong “exit strategies” (explained later on).
FIRST PARAGRAPH: First of all, it is necessary to define and explain what is quantitative easing. It is a relatively new monetary policy which was first introduced in Japan in 2001-2006. It is used when extremely low interest rates can not help. In Japan's case interest rates reached 0% and the central bank could not have gone any further to negative interest rates (even though some countries did this).So that more money could be circulated in the economy, when historically low interest rates can not help. Consequently, BoJ (Bank of Japan) used QE in order to increase central bank's balance sheet and make commercial banks lend money to businesses. In details this is done by purchasing assets (mostly government bonds or securities) from the banks by using “new money” (which are created electronically). By