Impact of Quantitative Easing on International Finance

This essay examines the impact of quantitative easing (QE) on international financial markets and econometrics, focusing particularly on the UK. It explains how QE, a monetary policy where central banks purchase government bonds and financial instruments to inject money into the economy, affects bank rates by reducing them. The policy increases bond prices, leading to lower interest rates, which in turn impacts other interest rates and asset prices. While QE has helped maintain economic strength, employment, and wages, it has also increased asset prices, disproportionately benefiting wealthier individuals. The essay further discusses the inverse relationship between interest rates and stock prices, noting that higher interest rates can decrease company profits and share prices. It also analyzes the effects of QE on exchange rates, highlighting how lower yields have encouraged investors to exchange UK assets for foreign ones with higher returns. The essay references data from the London Stock Exchange, showing the impact of QE announcements and the COVID-19 pandemic on stock prices, and concludes that while QE initially boosted share prices, the pandemic caused a significant drop, followed by a recovery due to further asset purchases by the bank.

International Financial
Markets and Econometrics

Table of Contents
REFERENCES................................................................................................................................1

Quantitative easing refers to monetary policy where the central bank purchases government
bonds and other financial instruments to inject money into economy for expansion in economic
activities. This policy impacts the bank rate as it reduces bank rate. For example, the QE policy
will increase the price of bonds due to increase in demand for the same. This increase in price of
bonds will reduce the interest rate or yield as price of bond and yield have inverse relationship
(Chortareas, Karanasos and Noikokyris, 2019). The lower interest rate of bond will also impact the
other interest rates in economy. Along with this purchasing of shares or assets of corporate will
lead to additional cash with them which will give opportunity to corporates and others with
additional cash to invest in other assets such as financial instruments. This increases price of
shares and other financial assets which provides owners of assets to sell their shares and increase
their earnings. The bank rate in UK was reduced to 0.5% to stimulate activities and prices in
country.
There is a negative impact of QE as it has increased the price of assets and other
properties which has benefitted wealthier members in the society but has negatively impacted
other members of society. The QE has helped government in keeping strong economic strengths,
rise in employment and higher wages. The interest rate and stock price move in opposite
direction. The increase in interest rate have effect on other charges that bank levy on customers.
This result into lowering of spending power of customers and customers take fewer loans
(Fatouh, Giansante and Ongena, 2021). This will also impact the companies as they will also be
bond to pay higher interest on debts taken by them. This will reduce the distribution profit of
company which ultimately result into decrease in price of shares. The increase in interest rate
decreases the price of bonds and shares of company which leads to bearing market and stock.
Where the interest rate is lower than coupon rate on bond the demand for bond increases which
leads to increase in price of bonds.
The aim of QE policy was to boost spending by increasing money supply in economy. To
accomplish this aim banks had purchased government bonds and other shares of companies. This
has positively impacted the prices of shares and there was boost in shares prices at London stock
exchange. According to data of London stock exchange for last five years it can be seen that
there were not much changes in prices of stocks from 2017-2019 due to various announcements
regarding QE (Corbet, Dunne and Larkin, 2019). The price of shares was maintained but in 2020
due to covid pandemic the prices of stocks again came down which become a very crucial

problem for companies and economy of country. The purchase of bonds and shares by bank to
help government and businesses has again resulted into increase in price of shares from around
5000 pound in 2020 to around 7000 pound in 2022. The QE and interest rate has also impacted
the exchange rate as decline in yield the investors were able to exchange UK assets with foreign
ones for higher returns.

REFERENCES
Books and journals
Chortareas, G., Karanasos, M. and Noikokyris, E., 2019. Quantitative easing and the UK stock market:
does the Bank of England information dissemination strategy matter?. Economic Inquiry. 57(1).
pp.569-583.
Corbet, S., Dunne, J. J. and Larkin, C., 2019. Quantitative easing announcements and high-frequency
stock market volatility: Evidence from the United States. Research in International Business and
Finance. 48. pp.321-334.
Fatouh, M., Giansante, S. and Ongena, S., 2021. Economic support during the COVID crisis. Quantitative
easing and lending support schemes in the UK. Economics Letters. 209. p.110138.
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