Quantitative Easing
BEA220-Intermediate Macroeconomics | BEA220 – Intermediate Macroeconomics | Assignment 1 | | | |
Lecturer: Dr Jui Saprungrueng |
Introduction
The aim of this report is to identify the meaning of “Quantitative Easing” and why it was adopted by central banks during the recent financial crisis. It will also try to identify what central banks were trying to achieve by using Quantitative Easing and how they planned to achieve that. The report will look at other financial crisis’ where Quantitative Easing was adopted and whether it was successful. Finally it will look at the risk involved with Quantitative Easing.
What is it?
The definition of Quantitative Easing varies among countries however the principals behind it are very much the same. When referring to the Bank of England’s monetary policy, economist Joe Ganley describes Quantitative Easing as the purchasing of financial assets by the reserve bank through the creation of new money. The money is created electronically and placed into accounts held by commercial banks. The injection of money is used when interest rates are close to zero in an attempted to increase spending and therefore increase inflation to the target rate of 2-3% (Ganley 2010). Japanese economists (Fujiki, Okina, & Shiratsuka) define Quantitative Easing as the purchasing of long-term government bonds and the implementation of a policy to increases bank reserves held with the central bank (Konstantinos & Werner 2010).The bank of Canada describes it as the purchase by a central bank of financial assets through the creation of central bank reserves. The price of purchased assets increase and the yield on the asset falls, resulting in an expansion of reserves available to commercial banks. This encourages banks to increase their supply of credit to businesses and households (Bank of Canada 2009).
Why did Central Banks use it during Global Financial Crisis?
The reason central banks used Quantitative
Lecturer: Dr Jui Saprungrueng |
Introduction
The aim of this report is to identify the meaning of “Quantitative Easing” and why it was adopted by central banks during the recent financial crisis. It will also try to identify what central banks were trying to achieve by using Quantitative Easing and how they planned to achieve that. The report will look at other financial crisis’ where Quantitative Easing was adopted and whether it was successful. Finally it will look at the risk involved with Quantitative Easing.
What is it?
The definition of Quantitative Easing varies among countries however the principals behind it are very much the same. When referring to the Bank of England’s monetary policy, economist Joe Ganley describes Quantitative Easing as the purchasing of financial assets by the reserve bank through the creation of new money. The money is created electronically and placed into accounts held by commercial banks. The injection of money is used when interest rates are close to zero in an attempted to increase spending and therefore increase inflation to the target rate of 2-3% (Ganley 2010). Japanese economists (Fujiki, Okina, & Shiratsuka) define Quantitative Easing as the purchasing of long-term government bonds and the implementation of a policy to increases bank reserves held with the central bank (Konstantinos & Werner 2010).The bank of Canada describes it as the purchase by a central bank of financial assets through the creation of central bank reserves. The price of purchased assets increase and the yield on the asset falls, resulting in an expansion of reserves available to commercial banks. This encourages banks to increase their supply of credit to businesses and households (Bank of Canada 2009).
Why did Central Banks use it during Global Financial Crisis?
The reason central banks used Quantitative
References: Konstantinos, V & Werner, A 2010, New Evidence on the Effectiveness of ‘Quantitative Easing’ in Japan, Centre for Banking, Finance and Sustainable Development, 2010.