Reason behind adoption of Quantitative easing

Quantitative Easing

Question: Reason behind adoption of Quantitative easing
Quantitative easing is a monetary policy technique that is generally adopted by the country
to stimulate spending in the market. Hence, the essay makes comprehensive discussion regarding
reason of adoption of this technique by European Central Bank in the year 2015. It also discusses
regarding deflation being major cause of this adoption.
The states regarding adoption of quantitative easing by European Central Bank in the
year 2015. Since, it is considered to be an unconventional easing policy where Central Bank
tends to purchase government securities or other kind of securities from the market in such a
manner that it leads to decline prevailing interest rates and enhances money supply in the
country. The strategy is adopted by ECB due to short term interest rates are at or approaching
zero and it does not involve any printing of new bank notes. It helped the country in encouraging
economic in such a manner that it allows Central Bank to buy certain government bonds from the
market (Fawley and Neely, 2013). It helped in lowering down short-term interest rates and
consequently increases overall money supply in the economy.
In the year 2015, European Central Bank announced 1.1 trillion Euro programs as a step
taken in the periphery of Quantitative easing. The reason was to create money in the market.
Moreover, the demand arising from the side of Central Bank helped in raising the prices of bonds
which means that interest rate tends to fall. Further, a decrease in rate of interest subsequently
stimulated enhanced spending by businesses and households. It helped in pulling out the
economy from any type of slump (Joyce and et.al., 2012).
Europe has been facing deflation, which led the Euro zone prices to be 0.2% lower than it
was a year earlier. It took place due to sharp fall in the prices trapping the European economy
into recession. Fall in the prices in wrong manner attracted the European Central Bank to take up
actions for Quantitative easing. Another issue that can be linked to the territory which attracted
the decision of Quantitative easing is wages going into downward spiral and borrowers not able
to meet their obligations (Kapetanios and et.al., 2012). The countries of European Union, such as
Ireland, Greece and Italy are already highly indebted, which is potentially a larger issue.
Quantitative easing helps in sustained adjustments between inflation and deflation. It will help in
expanding the market in such a manner that the spending bracket of individuals can be increased
to the maximum. It helps in stimulating growth in the country (ECB unveils €1.1tn QE plan to
stimulate eurozone economy, 2015).
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