Economics
Credit Easing vs Quantitative Easing
Credit easing and quantitative easing are both monetary policy tools used by central banks to stimulate the economy. Credit easing focuses on providing targeted support to specific sectors by purchasing assets such as corporate bonds, while quantitative easing involves the central bank purchasing government securities to increase the money supply and lower long-term interest rates. Both aim to boost economic activity but through different mechanisms.
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8 Key excerpts on "Credit Easing vs Quantitative Easing"
eBook - PDFRisk Management Post Financial Crisis
A Period of Monetary Easing
- Jonathan A. Batten, Niklas F. Wagner, Jonathan A. Batten, Niklas F. Wagner(Authors)
- 2014(Publication Date)
- Emerald Group Publishing Limited(Publisher)
Keywords: Abenomics; liquidity trap; market reference rate; quantitative easing; risk funds INTRODUCTION A commonly accepted view insists that the increase in monetary supply would lower the market rate easing liquidity and/or credit conditions, encouraging the enterprises as borrowers to invest in their projects since their funding cost is expected to be lowered. This view implies that the increase in monetary supply would encourage the banks as financial inter-mediaries or the investors as fund providers to provide more funds, which results in stimulating the macro-economy. To what extent is this view held? To predict the impact of the US monetary policy in a series of Quantitative Easing Policy (QEP) and Japan’s recent QEP in the so-called “ Abenomics ,” it is very important to re-examine the theories underpinning the view. Quantitative Easing (QE) refers to changes in the composition and/or size of a central bank’s balance sheet that are designed to ease liquidity and/or credit conditions ( Blinder, 2010 ). According to Bernanke and Reinhart (2004) , when the size corresponds to expanding the balance sheet, while keeping its composition unchanged, the policy is narrowly defined quantitative easing. On the other hand, when the composition corresponds to changing the composition of the balance sheet, while keeping its size unchanged by replacing conventional assets with unconventional assets, they narrowly define the policy as credit easing. In practice, given con-straints on policy implementation, central banks have combined the two elements of their balance sheet, size, and composition, to enhance the over-all effects of unconventional policy. In this context, broadly defined quanti-tative easing, often used in a vague manner, better fits as a package of unconventional policy measures making use of both the asset and liability sides of the central bank balance sheet, designed to absorb the shocks hitting the economy ( Shiratsuka, 2010 ).
- International Monetary Fund(Author)
- 2014(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
“It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion.” 26 Second, credit easing or enhanced credit support, designed to combat dislocation and disruption of markets and reestablish a more correct transmission mechanism. In line with this second understanding, unconventional monetary policy measures can be understood as massive financial intermediation, provided by the central bank at very low cost at a moment when markets are not functioning or are threatening to lose their liquidity and when the private sector financial institutions, savers, and investors are unwilling or unable to supply the appropriate intermediation. I will call paradigm 1 the quantitative easing (presentation and understanding) and paradigm 2 the credit easing (large-scale intermediation by central banks) interpretation. One might wonder why the interpretation and the presentation of what all central banks in the advanced economies are presently doing is of any importance. Still I think it is, as a matter of fact, relevant to consider what the implications of paradigm 1 and paradigm 2 are. Paradigm 1 If we are taking decision within the framework of paradigm 1, there will be a high level of mutual influence between the interest rate policy and the unconventional monetary policy measures
eBook - PDFThe Money Minders
The Parables, Trade-offs and Lags of Central Banking
- Jagjit Chadha(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
for transactions instead. Any increase in rates will tend to reduce the impact of the fiscal expansion. If on the other hand, money for transac- tions is expanded by some type of QE, interest rates need not rise and the full force of the stabilising effort will reach the economy. The second is more subtle and relies on the argument that in buying bonds, which are high in price at a low interest rate, the central bank is signalling that it will not raise interest rates which would lead to an immediate lowering of bond prices and a, perhaps significant, loss on the trading operation. Personally, I put more weight on the former as central banks seem more likely than not to make money from these trades because they were providing market participants with much-needed liquidity in the form of central bank money in exchange for less liquid bonds and thus will be profitable over the whole sequence of operations involving purchase and eventual run-off. 2 Following the financial crisis of 2008, quantitative easing (QE) – which I define as large-scale purchases of financial assets in return for central bank reserves – became a key element of monetary policy for a number of major central banks whose interest rates were at, or close to, the zero lower bound. However, despite its widespread use, the question of the effectiveness of QE remains highly controversial, with many arguing that it is printing money and likely ultimately to be inflationary. But to the extent that there has been under- mining of confidence in the nation’s currency, the demand has remained stable and there has been no jump in the velocity of circulation. As long as that persists, a new tool seems to have been uncovered. 6.2.1 QE as an Open Market Operation Generally speaking, quantitative easing is really just an extended open market operation involving the unsterilised swap of central bank money for privately held assets.
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 197 CHAPTER 9 Monetary Policy Tools While the emergency measures did help to stabilize financial markets, they were not enough to right the entire economy. The Fed needed to do something else, and thus quantitative eas-ing—American style—was born. 9-3b Quantitative Easing On November 25, 2008, in addition to its emergency lending programs already in place, the Federal Reserve announced it would purchase $100 billion of direct debt from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, along with up to $500 billion of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Fed was pursuing securities purchases not to reduce interest rates (think of a traditional expansion OMO) but to inject liquidity into markets. Immediately following the announcement, the interest rate on a 30-year, fixed-rate mortgage decreased by almost a full percentage point. The policy move would, in the future, be referred to as QE1 . QE1: The first round of quantitative easing undertaken by the Federal Reserve began in November 2008 and lasted until March 2010. Here is the time line of the Fed’s other quantitative easing moves: March 18, 2009 The Fed expands its debt purchases by announcing it will purchase an additional $100 billion in Fannie Mae and Freddie Mac debt and $750 billion in mortgage-backed securities. The Fed also announces it will buy $300 billion in longer-term Treasury bonds. The Fed announces the purchases to end by March 2010. November 3, 2010 The Fed pledges to start a new $600 billion long-term Treasury bond buying program until June 2011. The Fed will reinvest proceeds from mortgage-related holdings to buy the Treasury debt. This has been labeled QE2 . QE2: The second round of quantitative easing, or extraordinary expansionary monetary policy, undertaken by the Federal Reserve from November 2010 to June 2011.
eBook - PDFThe European Central Bank and the European Macroeconomic Constitution
From Ensuring Stability to Fighting Crises
- Klaus Tuori(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
The signalling effect also found some support, but the results on the real economy and on inflation are not very convincing, if still supportive of QE. However, most studies are conducted in central banks: unsurprisingly, these did not conclude that programmes had been failures. The way central banks have classified their QE programmes provides additional information. All recent QEs were activated when official interest rates were basically zero. In the USA, decisions on QEs were made by the FOMC, the organ responsible for monetary policy. 56 49 Bernanke et al. (2004), ‘Monetary Policy Alternatives’. 50 Berkmen (2102), ‘Bank of Japan’s Quantitative and Credit Easing’. 51 Krishnamurthy and Vissing-Jorgensen (2011), ‘The Effects of Quantitative Easing on Interest Rates’; Krishnamurthy and Vissing-Jorgensen (2012), ‘The Aggregate Demand for Treasury Debt’; D’Amico and King (2012), ‘Flow and Stock Effects of Large-Scale Treasury Purchases’; Gagnon et al. (2010), ‘Large-Scale Asset Purchases by the Federal Reserve’; Li and Wei (2012), ‘Term Structure Modelling with Supply Factors’. 52 Jarrow and Li (2014), ‘The Impact of Quantitative Easing on the US Term Structure of Interest Rates’, 287–321; Hamilton and Wu (2012), ‘The Effectiveness of Alternative Monetary Policy Tools’. 53 Fawley and Neely (2013), ‘Four Stories of Quantitative Easing’. 54 Joyce et al. (2010), ‘The Financial Market Impact of Quantitative Easing’. 55 Kapetanios et al. (2012), ‘Assessing the Economy-Wide Effects of Quantitative Easing’. 56 In the USA, the FOMC decides on the open market operations and the Board of Governors is responsible for the discount rate and reserve requirements. www.federalreserve.gov/ monetarypolicy/fomc.htm. 202 8 the ecb’s quantitative easing The first QE was linked to financial market conditions in addition to the overall economic situation.
- Wassim Shahin, Elias El-Achkar(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
The assets bought under both covered bonds programs were held by the ECB until maturity. 12 Quantitative easing: the asset-purchase program 2015–present The ECB decided to embark on QE policies or asset purchase programs in January 2015. The decision to pursue this new policy was based on two main considera- tions: the weak recovery, which lowered inflation rates undesirably near zero or well below the 2 percent level; and the uncertain impact of the traditional expan- sionary monetary policy based largely on interest rates reduction. Given weak growth, high unemployment, and extremely low inflation approaching deflation, reducing interest rates further, given their current level approaching zero and neg- ative, was shown not to be enough to steer inflation closer to 2 percent. With no room to cut interest rates any further, the asset purchase program was the only tool that might enable the ECB to achieve its objectives. Thus, the ECB reinforced the current monetary policy with more quantitative predictability. Additionally, one of the main aims of QE was to provide credit to the non-bank public by mitigat- ing the adverse effects that malfunctioning money markets were having on bank liquidity and credit conditions. All national central banks as well as the ECB participate in the asset purchases. The ECB coordinates the total amount to be purchased by various national central banks centrally. These amounts are allocated based on the institutional structure of the euro area, reflecting a common monetary policy, a single currency, a goal of price stability, and nineteen national fiscal and economic policies. The asset-purchase programs were described by the ECB as non-standard measures amounting to €60 billion per month starting March 2015. These pur- chases were initially intended to be carried out until the end of September 2016, when it was expected that the inflation rates will readjust to a level closer to but still less than 2 percent.
- Imad A Moosa(Author)
- 2016(Publication Date)
- WSPC(Publisher)
Chapter 9
The Regulatory Implications of Quantitative Easing
1.Introduction
The objective of financial regulation in the post-crisis era is to make the recurrence of a similar crisis less likely, based on the lessons learned from the experience of 2007–2008. We have learned from the crisis that something must be done about leverage, liquidity, underwriting standards, moral hazard and several other factors that caused the crisis and determined its severity. It seems, however, that we have not learned anything about the role of macroeconomic policy in initiating the crisis — that is, the hazard of keeping interest rates so low for so long. The low interest rate environment that prevailed for a long time in the run-up to the crisis led to bubbles in asset markets, particularly the housing market. Motivated by greed, the financial oligarchs capitalized on the low interest environment and asset market bubbles and indulged in a kind of behavior that eventually inflicted enormous damage on the economy and society. If low interest rates played a pivotal role in the initiation and intensification of the crisis, it does not make any sense to pursue an ultra-low interest policy in its aftermath. Furthermore, the effectiveness of regulation in preventing future crises will be undermined by a monetary and financial environment that is conducive to the occurrence of crises.The environment of ultra-low interest rates prevailing worldwide at the present time is the result of quantitative easing (QE), a policy whereby the central bank produces new money that is used to buy securities (of various kinds and maturities) from financial institutions. In the process, security prices rise and yields decline — in other words, the objective of QE is to keep interest rates at a low level across a spectrum of maturities. The declared objective is to boost the real sector of the economy as lower interest rates provide an incentive for households and firms to spend more than they would otherwise, boosting economic activity. QE is used to push down the cost of borrowing to a lower level than what can be achieved by using conventional interest rate policy, which typically targets a particular short-term rate (such as the federal funds rate).
eBook - PDFMonetary Policy in the Context of Financial Crisis
New Challenges and Lessons
- Fredj Jawadi, William A. Barnett(Authors)
- 2015(Publication Date)
- Emerald Group Publishing Limited(Publisher)
435 A Comparison of the Fed’s and ECB’s Strategies In such a context, the Fed had no choice but to provide short-term liquidity to the money market dealers by easing the borrower’s credit con-straint. This has been done through three programs aiming at reducing the required margins on new funds and by increasing the value of pledgable assets. The programs were respectively a Term Auction Facility (TAF) in August 2007, a Primary Dealer Credit Facility (PDCF), and Term Securities Lending Facility (TSLF) in March 2008. At this time, nobody was talking yet about « quantitative easing policy » , since the Fed was pursuing these policies by keeping the size of its balance sheet roughly constant. 4 Banks and financial institutions were not inclined to borrow money from the discount window (even at a lower discount rate) because they feared additional “stigma” costs. The actions undertaken by the Fed thus aimed at boosting the refinancing through the interbank market by reducing the illiquidity risk. The policies were unconventional in the sense that the monetary authorities expanded the set collaterals that could be pledged, they extended the maturities of the securities sold by the deposi-tory institutions, and were proceeding to a “clean-up” of the balance sheets though the exchange of illiquid asset for liquid assets. Until April 2008, the Fed did not behave as a lender of last resort, but rather introduced innova-tions in such a way that the solvent institutions that were able to make loans could do it. Several empirical works show that these measures have put a downward pressure on the market interest rates. 5 Similarly, the ECB wanted to provide liquidity to the interbank market to address the liquidity crisis. However, the “unconventional conventional” policies last a longer period in the euro area. The ECB has maintained its intermediation role between banks and the financial institutions (between the core and peripheral countries).
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