Quantitative Easing

11 Key excerpts on "Quantitative Easing"

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  Risk 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 ).

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  The 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.

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  Contemporary Issues In The Post-crisis Regulatory Landscape

  • 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).

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  Banking and Monetary Policies in a Changing Financial Environment

  • Wassim Shahin, Elias El-Achkar(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. For all countries adopting QE, the basis of the decision to exit seems to be the improvement in the state of the macroeconomy, including careful attention to economic growth, unemployment, and price stabil- ity. We expect the other issues to be country specific, but also very similar in terms of the transparency of the announcements and the gradual implementation designed not to affect the outcome of the entry. Notes 1 The figures reported are based on Fawley and Neely 2013. The study discusses the case of Japan and other countries extensively. Our study does not address the Japanese situation in detail and confines the analysis to the US and UK in this chapter and the experience of the ECB in the next one. However, some examples relating to Japan are mentioned when need arises. 2 Bullard 2010. Monetary policy and Quantitative Easing 217 3 A very thorough analysis on which these figures are based is found in Sengupta and Tam Yu 2008. The authors detail the discussion of the LIBOR-OIS spread to highlight the severe credit crunch resulting from the financial crisis. 4 This information is based on Fuhrer 2015. The author mentions several sections of the Federal Reserve Act dealing with lending to depository institutions under Section 10(B), individuals, partnerships, and corporations under Section 13(3). The material also discusses the Federal open-market operations authorized in Section 14 of the Act. 5 These liquidity programs were compiled from various studies, namely Fuhrer 2015; Mishkin 2013; and Blinder 2010. 6 The information on QE in the US provided in this section was compiled from various sources, namely Bernoth et al 2015; Fuhrer 2015; Fawley and Neeley 2013; Blinder 2010; and Bullard 2010.

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  Financial Issues in Emerging Economies

  SPECIAL ISSUE Including selected papers from II International Conference on Economics and Finance, 2019, Bengaluru, India

  • Rita Biswas, Michael Michaelides, Rita Biswas, Michael Michaelides(Authors)
  • 2020(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  By the end of 2008, the federal funds rate was reduced to zero. Till December 2015, the rate was maintained at zero – the zero-interest rate policy (ZIRP). But ZIRP was not enough to reduce real interest rates and revive demand. The policy is also closely related to liquidity trap, since nominal interest rates cannot adjust downwards. However, some monetary economists believed that Unconventional monetary policy (UMP) like Quantitative Easing (QE) could be effective when used alongside ZIRP (Reifschneider, 2016 ; Yellen, 2016). In QE, a central bank expands its balance sheet by purchasing government securities or other securities from the market in order to lower interest rates and increase the money supply in the economy. The increased liquidity to the financial institutions in turn is expected to increase lending and brings back growth. Balance sheet expansion is the most common form of QE. Other such policies involve direct lending to specific credit markets. The origin of QE can be traced back to Japan in the 1990s. During that time, Japan was dealing with the burst of a real estate bubble and the deflationary pressure which had followed. Since the policy rates were already zero, Bank of Japan (BoJ) aimed to increase the cash levels held by banks by purchasing government securities. This was the first time any central bank had targeted a level of reserves, which was a major shift from the existing policies. Since then, three other major central banks – US Fed, BoJ, European Central Bank and Bank of England also resorted to QE in last two decades. While QE was adopted by the developed economies to boost its asset prices, the transmission channels were not always limited to only the economy implementing the QE. There were spillover effects on other economies as well, especially Emerging Market Economies (EMEs). The transmission of QE to the asset prices may occur through several channels

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  International Financial Markets

  • Hung-Gay Fung, Yiuman Tse, Hung-Gay Fung, Yiuman Tse(Authors)
  • 2013(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  2. Literature review 2.1. Quantitative Easing: the programs In the wake of systemic market dysfunction and faced with effectively zero interest rates, the United States Federal Reserve enacted three simulta-neous extraordinary interventions. The first two were to lend directly to financial institutions and provide liquidity to select credit markets while the third, the focus of this study, were Large-Scale Asset Purchases and a Maturity Extension Program (LSAP and MEP, respectively; Fratzscher, Duca, & Straub, 2012 ). LSAPs operate by lowering (increasing) the supply of longer-duration (zero duration and convexity) assets. Under the assumption that long-and short-duration assets are not seen as perfect substitutes by investors, LSAPs lower long-term yields given that a relative decrease of long-term assets’ supply will lead to a lowering of these assets’ risk premiums ( Gagnon, Raskin, Remache, & Sack, 2011b ). The Fed announced in late November 2008 the initiation of its first LSAP which would purchase up to $600 billion in Mortgage Backed Security assets and agency debt. This program, also known as the first round of Quantitative Easing (QE1) was expanded in March 2009 with an additional purchase of $850 ($300) billion in agency securities (long-term US Treasuries). QE1 ended in March 2010 yet, with the subsequent fall in asset prices shortly thereafter, a second round of Quantitative Easing (QE2) was announced in November 2010. QE2 was designed to purchase up to $600 billion in longer-term treasury securities effectively allowing the Fed to inflate asset prices and create a demand-inducing wealth effect. QE2 ended in June 2010 leading to a complete withdraw of extraordinary monetary stimulus. The Impact of Quantitative Easing on Asset Price Comovement 141 Finally, the Fed announced in late September 2011 the initiation of a Maturity Extension Program, better known as Operation Twist.

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  On Unemployment, Volume II

  Achieving Economic Justice after the Great Recession

  • Mark R. Reiff(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  377 Unfortunately, however, the Fed’s belated effort in this regard did not produce much relief, although it did not cause any harm either—inflation remains well below the target rate—yet the unemployment rate dropped very slowly and much of this drop simply represented people leav- ing the workforce not actually finding jobs. 378 In part this is no doubt because Quantitative Easing is a much less efficient tool for stimulating investment than public spending, the tool available to the legislative branch. Quantitative Easing aims to lower interest rates and therefore make borrowing for investment more What Justice Requires That We Do ● 51 attractive to borrowers, but it has not done much to encourage banks to lend, and in any event tends to disproportionally benefit the already well off. 379 This has led some to call for even more aggressive action by the Fed. 380 Others, of course, remain unconvinced of the wisdom of any action by the Fed aimed at combating unemployment. 381 Nevertheless, the Fed said it would continue sup- pressing interest rates until the unemployment rate fell to 6.5 percent, and even now that this threshold has been passed, the Fed has indicated it would continue to keep rates low for some time. 382 Although no one is exactly sure what this means, 383 the market seems to think this means interest rates will start to rise in middle to late 2015. 384 The Bank of England has taken a similar position, initially stating that it would not begin to raise interest rates until unemploy- ment fell to at least 7 percent in the United Kingdom but then keeping rates low even after this goal was reached given that there was no sign of inflation on the horizon. 385 Unlike the Fed, however, the Bank of England has kept its own program of Quantitative Easing ongoing.

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  Pursued Economy

  Understanding and Overcoming the Challenging New Realities for Advanced Economies

  • Richard C. Koo(Author)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  But if the Fed had succeeded in removing the excess liquidity, it would have regained the power and mobility Volcker had in his battle against inflation, putting it in a very credible position as an inflation fighter to combat price increases that are now unfolding in the United States. A post-pandemic surge in pent-up demand has combined with supply mismatches and energy shortages to push prices significantly higher. Furthermore, market participants will not know whether this surge is temporary or not until several years have passed. In the meantime, the markets may experience a bond market sell-off that could make everything more difficult. At such times, nothing calms the market better than a central bank with strong inflation-fighting credentials. To regain that credibility, central banks must raise inter- est rates and implement QT to demonstrate their commitment to controlling inflation, even if those actions roil the markets (= QE trap) in the short run. Monetary Policy during the Pandemic and the Quantitative Easing (QE) Trap 271 The Total Cost of QE May Outweigh Benefits The potential for the exit from QE to raise bond yields and exchange rates prematurely and dampen economic activity means the total cost of QE cannot be determined until the normalization of mone- tary policy is completed. When the costs and benefits are examined over the course of the policy’s lifetime, those initial benefits may well turn out to be small relative to the subsequent costs of unwind- ing the policy. Ultimately, central banks that implemented QE will probably be forced to use all the tools at their disposal to either sterilize or drain excess liquidity when borrowers return. Those tools would include tougher capital, liquidity and reserve requirements as well as moral suasion to keep banks from lending to the private sector. In other words, some sort of “financial repression” may be neces- sary when borrowers return.

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  Banking Crises

  Perspectives from the New Palgrave Dictionary of Economics

  • Garett Jones(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  et al . (2000) suggest that asset purchases might be a way of signalling a commitment to keep short-term policy rates low in the future, as the increase in the size of the bank’s long-term bond holdings would leave it vulnerable to capital losses in the event that it were to raise policy rates sooner or more aggressively than financial markets expected. For economists of the New Keynesian School policy signalling is likely to be the most powerful channel of QE in boosting the economy (Woodford, 2012). In addition, the more aggressive monetary easing should boost inflation expectations and reduce the probability associated with a tail-risk scenario such as a Japanese-style deflationary cycle. The combination of delayed expectations of the timing of the first tightening in short-term interest rates and increased inflationary expectations should ensure that the projected path of real short-term interest rates is lower than prior to the onset of QE. This should encourage the private sector to bring forward future spending and also boost asset prices.

  Portfolio rebalancing: This is one of the key transmission mechanisms cited by both the BoE and the Fed. The BoE aims to purchase government bonds from the non-bank private sector such as pension funds, insurance companies and hedge funds. The BoE gains an asset in the form of a government bond and a liability in the form of the electronically created money it has deposited in the sellers account which adds to outstanding reserve balances. Given that the seller is unlikely to view the cash as a perfect substitute for the asset sold (given differences in risk characteristics e.g. duration, yield etc.) they are likely to want to use the cash to rebalance their portfolios by purchasing assets that are better substitutes such as corporate bonds and equities (Brunner and Meltzer, 1973; Friedman and Schwartz, 1982). This should boost the prices of these other assets and reduce the yield on them (given that the yield moves inversely to prices). Higher asset prices increase wealth across the economy, whilst the lower yields on these assets reduce the cost for corporations of raising external financing via corporate debt and equity markets. According to Joyce et al

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  A Global Monetary Plague

  Asset Price Inflation and Federal Reserve Quantitative Easing

  • Brendan Brown(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2 How Fed Quantitative Easing Spread Asset Price Inflation Globally

  Superficially, when we look at the monetary history of the years following the Great Panic and Recession, it seems that many countries, not just the US, were conducting big monetary experiments, where these involved deployment of non-conventional monetary tools, sometimes including so-called Quantitative Easing (QE). In fact, some economists including central bank officials have done a cross-sectional analysis on these experiments so as to refine their judgements about the effectiveness of QE in particular (see Gambacorta, 2014). Yet in reality, the experiments have not been independent of each other. The Obama Great Monetary Experiment (GME) plays a dominant role in determining the course and outcomes of all the other experiments.

  Fed QE dominates foreign monetary experiments

  This dominance of the GME over all other contemporaneous monetary experiments stems from the number one position of the US dollar in the global economy, and on the huge size, in absolute and relative terms of the US economy and US markets. For example, there are many investors outside the US who use the dollar as their primary money. They make their spending and investment decisions based on calculations in which the US dollar is their reference money. And so, these investors are directly affected by US monetary manipulations as described in the previous chapter.

  In particular, the huge growth in the Federal Reserve balance sheet, the targeting of 2% inflation, the stirring up of US inflation expectations to match, the attempts of the Federal Reserve to manipulate long-term US interest rates well below neutral level and the assault against mythical deflationary threats have all induced patterns of irrational behaviour amongst such non-US investors. In consequence the reach of the asset price inflation disease (otherwise described as the plague of market irrationality with its source in the GME) is worldwide. Patterns of irrational behaviour emerge in many disparate market-places with investors on the lookout for exciting speculative stories not just in the US and in dollar-denominated paper, but everywhere, including non-dollar paper. And in particular, in the carry trades (whether in currencies, credit or long-maturity interest rates), the weight of dollar-based investors is especially heavy given the overall importance of the US currency.

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  Banking and Monetary Policies in a Changing Financial Environment

  A regulatory approach

  • Wassim Shahin, Elias El-Achkar(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  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 considerations: the weak recovery, which lowered inflation rates undesirably near zero or well below the 2 percent level: and the uncertain impact of the traditional expansionary 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 negative, 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 mitigating 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 purchases 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. However, in its meeting of December 3,2015, which was reconfirmed in the press conference of the President of the ECB Mario Draghi on January 17, 2016, the ECB decided to extend the asset-purchase program at least until March 2017. In the December meeting the Governing Council made five major decisions concerning traditional and non-traditional monetary policy.13 First, the interest rate on the deposit facility was lowered by 10 basis points to –0.30 percent, while other interest rates were unchanged. Second, the asset purchase program was extended until the end of March 2017. or possibly further if need arises in line with the ECB's goal of price stability. Third, a decision was made to reinvest the principal payments on the securities purchased to achieve a favorable liquidity condition. Fourth, it was decided to include in the list of purchased assets by the national central banks euro-denominated marketable debt instruments issued by regional and local governments located in the euro area. Fifth, a decision was made to continue for as long as necessary, as fixed rate tender procedures, the main refinancing operations and three-month longer-term refinancing operations. Thus, it seems that the ECB is planning to remedy the impact of the financial crisis through policies of QE consisting of asset-purchase programs, with the list of assets being extended regularly to provide the necessary liquidity and diversified to include new assets. The expanded asset-purchase program that had started in March 2015 will include the third covered bond purchase program CBPP3 (after €60 billion in 2009 and €16.7 billion in 2011). the asset-backed securities purchase program, and the public sector purchase program. The securities covered by the public sector purchase program include: nominal and inflation-linked central government bonds and bonds issued by recognised agencies, international organisations, and multilateral development banks located in the euro area. The eurosystem intends to allocate 88 percent of the total purchases to government bonds and recognised agencies and 12 percent to securities issued by international organisations and multilateral development banks.14

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