Quantitative Easing and its Impacts

This assignment delves into the multifaceted consequences of quantitative easing (QE). Students are tasked with analyzing the impact of QE on financial markets, assessing its influence on inflation rates, and evaluating its contribution to overall economic growth. A comprehensive examination of both the positive and negative ramifications of QE is required.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1BUSINESS ECONOMICS
Introduction
The dynamics faced by the economies across the world are significantly attributed to the
interactions of the demand and the supply side players of those economies and the behavioral
patterns of the consumers as well as the producers of the different goods and services produced
in the concerned economy. These dynamics in the demand and the supply side scenarios in an
economy are in general, governed by the economic policy framework designed by the
government of the concerned countries, which in turn consists of two types of policies, the fiscal
and the monetary policies (Conrad and Poole 2012). The former deals with the variables like
government spending and tax aspects, the latter primarily works in the aspects of market rate of
interests, the money supply and other monetary attributed of the economy. The monetary policies
are in general implemented and regulated by the monetary authorities (Central Banks in most
cases) of the countries (Galí 2015).
Over the years, the policy frameworks of the countries in the global scenario have
changed and modified significantly, owing to the dynamics in the domestic as well as the
international economic scenarios. Owing to these dynamics in the global economic, the
economies often experiences fluctuations in their growth trends, both positive as well as
negative. To address these scenarios, the monetary authorities modify and improvise policies to
stimulate or restrain the economic activities of the country as per the needs of the situations
(Kiyotaki and Moore 2012).
In this context, one of the most popular monetary policies in the contemporary periods,
which have been into usage in the policy framework of many dominant economies in the global
scenario, is that of the policy of Quantitative Easing. The policy has been consistently

2BUSINESS ECONOMICS
implemented in the USA, the United Kingdom, European countries and Japan to stimulate
economic growth (Fawley and Neely 2013). Taking this into account the essay tries to analyze
and critically discuss the implications of such a policy on the overall economic conditions of the
countries implementing them, with the support of the empirical evidences of the performances of
different economic indicators in the concerned countries over the years.
Quantitative Easing
Quantitative easing, in the contemporary economic framework, is one of the most
widespread and popular expansionary monetary policies which are being used by many of the
prominent economies in the global scenario, with the primary objective of increasing the
economic activities in the country, thereby spurring the overall growth of the concerned
economy. The policy works by lowering the market interest rate of the economy, based on the
working economic notion that the reduction of the same can lead to an increased in the amount
of money borrowed, both for the purpose of investment and for consumption (Joyce et al. 2012).
The increase in investment and consumption, in turn, are expected to stimulate the economic
activities in the country, by raising both the aggregate demand and the aggregate supply in the
economy. Often the quantitative easing policy is taken by the monetary authorities of the
countries when the concerned economy are going through recessionary situations or are
experiencing economic and industrial stagnations, characterized by less economic production
and slow or negative economic growth (Fratzscher, Lo Duca and Strau 2016).
How the policy works
Economic stagnation or recession depicts a situation of low economic growth, less
productions, lower aggregate demand and supply in the economy, which decreases the welfare of

3BUSINESS ECONOMICS
the residents of the economy and have long lasting effects (mostly negative) on the economy’s
prosperity and sustainability. Often, in the presence of such situations, the central bank or the
monetary authorities of the country in consideration, tries to stimulate the growth and productive
activities in the economy through improvisations in its policy framework. One of such policy is
that of the quantitative easing policy (Martin and Milas 2012). Under this policy, the central
bank of the economy starts buying public bonds and private bank securities profusely, thereby
creating an excess liquidity in the banks as well as in the economy. Due to the presence of huge
excess reserves, the banks compete with each other in terms of providing increased amount of
loans to the residents of the concerned country. This in turn, reduces the rate of interest
prevailing in the market.
The fall in the interest rate encourages the investors and the businesses to borrow more,
which helps in expansion of their businesses, increasing the economic activities. On the other
hand, households are also encouraged to borrow more, for the purpose of consumption of goods
and services. Thus, the fall in the rate of interest, facilitates increase in both the aggregate supply
as well as the aggregate demand of the country, thereby stimulating economic activities in the
country as a whole, which helps the country to come out of the stagnancy. The policy, by
increasing the economic activities creates new scopes of employment and the dynamics in the
interest rates attracts investments from other parts of the world and facilitates exports by making
them cheaper.
Implementation of Quantitative Easing in global scenario
The Bank of Japan first implemented the policy in 2001, following a prolonged period of
deflation and an overall economically stagnant situation. To remove the slow growth of the

4BUSINESS ECONOMICS
economy, the Central Bank of the country implemented the expansionary monetary policy of
quantitative easing by creating huge liquidity with the commercial banks, thereby increasing
their lending capabilities and bringing down the rate of interest almost near to zero.
The footsteps of Japan was followed by the two most influential economies in the global
framework, the Unites States of America and also the economy of United Kingdom, followed by
other economies of the Euro Zone. During the period of 2007-2008, owing to the Global
Financial Crisis, these economies faced a massive stagnation and acute recessionary situation,
with substantial loss of economic productivity. To come out of the situation, these economies
took resort to the implementation of the quantitative easing policy. The implementation of the
same had mixed effects on the concerned economies over the years, which are discussed in the
following sections (Breedon, Chadha and Waters 2012).
Positive implications of Quantitative Easing
One of the primary positive implications of the lowering of interest rates under the
quantitative easing policy is the spur in the borrowing activities, of both the businesses as well as
the households, which in turn increases investment as well as consumption in the economy.
Together, these increases facilitates the increase in both aggregate demand as well as supply in
the economy, thereby taking the economy on the path of sustained growth, which is reflected in
the growth parameters like GDP of the countries.

5BUSINESS ECONOMICS
Figure 1: Dynamics in Interest Rate and GDP of the USA
(Source: Tradingeconomics.com, 2018)
The above empirical evidence for the USA, asserts the presence of positive implications
of quantitative easing on the economy. As can be seen from the figure, post imposition of the
policy, the GDP of the country, which steeply declined in 2008, started to gain back its growth.
With the increase in the GDP and economic activities, newer jobs are also created as the
domestic businesses expand considerably. This in turn helps to keep the unemployment rate
substantially low (Hausken and Ncube 2013). This has been specifically true for the economies
of the UK and the USA, as during the Crisis of 2008; there were huge chances of prolonged and
alarmingly high unemployment in the countries. However, the timely implementation of the
quantitative easing helped these countries decreasing their unemployment.

6BUSINESS ECONOMICS
Figure 2: USA unemployment over the years
(Source: Tradingeconomics.com, 2018)
These effects are accompanied by other positive effects, including the removal of toxic
assets, proper intervention of the government and the overall stability in the overall price levels
of the concerned countries.
Negative Implications: Asset Bubble
In spite of the presence of considerable positive implications of the policy, there are
several threats, which the policy poses with respect to the welfare of the economy as a whole.
The primary potential problem, which can arise out of the same, is that of the creation of asset
bubble in the economy. Under quantitative easing, borrowing activities increase substantially,
among the investors as well as the households (Huston and Spencer 2017). They tend to invest
this money for asset building, thereby increasing the demand in the asset market, putting upward
pressure in the price levels. Thus, an investment bubble is created in the economy, which can

7BUSINESS ECONOMICS
burst anytime, thereby creating immense negative fluctuations in terms of defaulting, bankruptcy
and stalled economic growth in the economy.
Figure 3: Housing Prices in the economies
(Source: Moodys.com, 2018)
As can be observed from the above figure, over the years, the housing prices in the
European economies and in UK are being increasing significantly, much due to the
implementation of the Quantitative Easing policy implemented in the countries. This is the
indication of the creation of the anticipated asset bubble (Lyonnet and Werner 2012).
Conclusion
It can be concluded, from the above discussion that, the policy of quantitative easing, has
been undertaken by many of the eminent economies in the global scenarios, keeping in mind the
need of boosting their productive and economic activities. There are several benefits of such
policies like that of the increase in the GDP, decrease in the threats of prolonged unemployment

8BUSINESS ECONOMICS
and disposal of corrupt assets, which are being supported by the empirical evidences available
across the globe. However, with this policy in action, there remains the threat of formation of
asset bubbles in the economy, the bursting of which has the potential to stall the growth of the
same.

9BUSINESS ECONOMICS
References
Breedon, F., Chadha, J.S. and Waters, A., 2012. The financial market impact of UK quantitative
easing. Oxford Review of Economic Policy, 28(4), pp.702-728.
Conrad, C. and Poole, M.S., 2012. Strategic organizational communication: in a global
economy. John Wiley & Sons.
Fawley, B.W. and Neely, C.J., 2013. Four stories of quantitative easing. Federal Reserve Bank of
St. Louis Review, 95(1), pp.51-88.
Fratzscher, M., Lo Duca, M. and Straub, R., 2016. On the international spillovers of US
quantitative easing. The Economic Journal.
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Hausken, K. and Ncube, M., 2013. Quantitative Easing and its Impact in the US, Japan, the UK
and Europe.
Huston, J.H. and Spencer, R.W., 2017. Quantitative easing and asset bubbles. Applied
Economics Letters, pp.1-6.
Joyce, M., Miles, D., Scott, A. and Vayanos, D., 2012. Quantitative easing and unconventional
monetary policy–an introduction. The Economic Journal, 122(564).
Kiyotaki, N. and Moore, J., 2012. Liquidity, business cycles, and monetary policy (No. w17934).
National Bureau of Economic Research.

10BUSINESS ECONOMICS
Lyonnet, V. and Werner, R., 2012. Lessons from the Bank of England on ‘quantitative
easing’and other ‘unconventional’monetary policies. International Review of Financial
Analysis, 25, pp.94-105.
Martin, C. and Milas, C., 2012. Quantitative easing: a sceptical survey. Oxford Review of
Economic Policy, 28(4), pp.750-764.
Moodys.com (2018). Moody's Public Sector Europe: UK housing associations' stable outlook
for 2018 supported by more favourable policy environment and effective cost management.
[online] Moodys.com. Available at: https://www.moodys.com/research/Moodys-Public-Sector-
Europe-UK-housing-associations-stable-outlook-for--PR_376046 [Accessed 18 Jan. 2018].
Tradingeconomics.com (2018). United States GDP Growth Rate | 1947-2018 | Data | Chart |
Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-
states/gdp-growth [Accessed 18 Jan. 2018].
Tradingeconomics.com (2018). United States Unemployment Rate | 1948-2018 | Data | Chart |
Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-
states/unemployment-rate [Accessed 18 Jan. 2018].