Must “Quantitative Easing” End in Inflation?
Must “quantitative easing” end in inflation?
Quantitative easing is the increase of the money supply of banks from the government buying financial assets for the purpose of lending money. This is in response to a decrease in demand due to a fall in consumer and business spending. When the base rate are close to zero (liquidity trap), as they are now in the UK, monetary policy to stimulate the economy by lowering interest rates cannot be used. So in this case, quantitative easing can be used to lead to higher economic growth by raising the prices of the financial assets which are bought, thus lowering the yield.
Essentially quantitative easing involves central banks printing money by purchasing securities from the private sector. Quantitative easing can be used to increase inflation to the target rate. Quantitative easing does this by increasing the monetary base, as the amount of currency in circulation. By purchasing the securities from the private sector, the value of government bonds increases with the increase in demand. The bonds are mo9re expensive to buy, so the incentive for investment is low. Therefore the firms who sold the bonds could use their profits to invest in other firms or lend the money out. Pension funds and insurance firms could now lend more, with lower interest rates changed, and so there could be more spending and therefore higher inflation.
In this state of economic uncertainty and threats of triple recessions, consumers are not exactly lining up at the bank to create new credit, they are trying to pay their debts. In this stagnant economy, there is high unemployment, high household saving ratio and disincentive for firms to invest. Quantitative Easing is meant to give investors more incentive to make riskier investment by pushing the price of safer investments up. With bong prices high, the cost of investment for large firms that are able to generate profits on the capital market is reduced. However, Quantitative Easing does not help
Quantitative easing is the increase of the money supply of banks from the government buying financial assets for the purpose of lending money. This is in response to a decrease in demand due to a fall in consumer and business spending. When the base rate are close to zero (liquidity trap), as they are now in the UK, monetary policy to stimulate the economy by lowering interest rates cannot be used. So in this case, quantitative easing can be used to lead to higher economic growth by raising the prices of the financial assets which are bought, thus lowering the yield.
Essentially quantitative easing involves central banks printing money by purchasing securities from the private sector. Quantitative easing can be used to increase inflation to the target rate. Quantitative easing does this by increasing the monetary base, as the amount of currency in circulation. By purchasing the securities from the private sector, the value of government bonds increases with the increase in demand. The bonds are mo9re expensive to buy, so the incentive for investment is low. Therefore the firms who sold the bonds could use their profits to invest in other firms or lend the money out. Pension funds and insurance firms could now lend more, with lower interest rates changed, and so there could be more spending and therefore higher inflation.
In this state of economic uncertainty and threats of triple recessions, consumers are not exactly lining up at the bank to create new credit, they are trying to pay their debts. In this stagnant economy, there is high unemployment, high household saving ratio and disincentive for firms to invest. Quantitative Easing is meant to give investors more incentive to make riskier investment by pushing the price of safer investments up. With bong prices high, the cost of investment for large firms that are able to generate profits on the capital market is reduced. However, Quantitative Easing does not help
Bibliography: http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.scmp.com/business/article/1040147/warning-quantitative-easing-could-end-causing-deflation http://en.wikipedia.org/wiki/Quantitative_easing http://blogs.ft.com/gavyndavies/2013/05/23/falling-inflation-complicates-the-feds-qe-exit-plan/? http://www.mcm.com/assets/publications/unanchored_expectations.pdf http://www.bbc.co.uk/news/business-15198789 http://coppolacomment.blogspot.co.uk/2013/05/inflation-deflation-and-qe.html http://www.economicsnetwork.ac.uk/true_showcase/quantitative_easing