Implementation of Quantitative Easing Policy and Its Economic Impacts

This report provides a detailed analysis of Quantitative Easing (QE) policy, a monetary strategy employed by central banks to stimulate economic growth. It examines the implementation of QE, focusing on the Bank of Japan's (BOJ) experience in the 2000s, and its effects on interest rates, inflation, and overall economic performance. The report explores the theoretical underpinnings of QE, including the two-period overlapping generations model and the Taylor rule, to assess its impact on aggregate demand, deflation, and the credit channel. The analysis considers both the potential benefits and limitations of QE, drawing on empirical evidence and academic research to evaluate its effectiveness in achieving its objectives. The report also discusses the potential for negative interest rates and the zero lower bound in the context of QE. The report further explores how QE affects the domestic and foreign markets. This assignment is available on Desklib, a platform offering AI-powered study tools for students.

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 1
IMPACTS OF QUANTITATIVE EASING POLICY IN AN ECONOMY
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IMPLIMENTATION OF QUANTITATIVE EASING POLICY 2
Quantitative Easing Policy simply refers to the alternative monetary plan in which central
banks buys budgetary tools and financial possessions owned by commercial banks purposely to
motivate the growth of an economy, and upsurge the monetary foundations. It emanates into
application when the normal monetary policy proves to be unsuccessful, and the markets strive
for an outside promoter to kindle the economy (Krishnamurthy and Vissing, 2011, p.114).
Opinions in the approval of Quantitative Easing Policy
In the event of economic downturn, governments incline to put on expansionary financial
policy so as to depose the interest rates and encourage economic growth; however, when the of
these interests approaches zero, this monetary policy turns almost useless. During these
conditions, the central bank begins to purchase financial assets from the commercial banks and
other monetary organizations leading to an inflow of money into the market (Krishnamurthy and
Vissing, 2011, p.120).
The buying of these financial capitals by the central bank brands gives them more value
which consecutively reduces their yield. As they turn out to be more costly to buy, both banks
and financial organizations give inclination to utilizing the incoming money in supplying other
possessions like stock and pledges over purchasing additional of these assets. This primes to a
condition in which all the monetary bodies are ready to offer loans and invest in several other
institutions leading to a considerable decline in the rates of interests. Consequently, an upsurge in
the expenditure practices is noticed, leading to stabilization in the economy sector
(Krishnamurthy and Vissing, 2011, p.126).

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 3
This task describes an exploration to gauge the effects as a result of enactment of this
policy on the economic sector and specifically, bank loaning of the most noticeable preceding
example of exceptional monetary incentive, the Japan’s “policy of quantitative easing”
commonly referred to as QEP. In the outcome of the abounding of Japan’s fizz economy of the
year 1990, trade and industry activities deteriorated and the consumer price depression become
entrenched. The BOJ (Bank of Japan) despite reducing its policy rates to absolute zero level by
the year 1999, the condition refused to reverse (Shiratsuka, 2011, p.187). In the year 2001,
deterioration in consumer prices, weakening banking systems and the overlook of the repeated
recession as a result of worldwide IT bubble collapse stimulated the Bank of Japan to introduce
QEP (Bowman, Cai, Davies & Kamin, 2011, p.156).
The Quantitative Easing Policy comprised of 3 major key basics: (1) the Bank of Japan
reformed its main objective of operation from uncollateralized dramatic call rates to due current
account of balances (CABs) apprehended by monetary organizations at the Bank of Japan, and
eventually advanced the CAB very well in surplus of the needed reserves. (2) The Bank of Japan
advanced its securing levels of government pledges by incorporating long term JGBs with
several other possessions purposely to realize the anticipated increase in CABs. (3) The Bank of
Japan devoted to uphold the QEP up to when the core CPI stopped to decline (Bowman et al.,
2011, p.158).
The Quantitative Easing Policy started in May 2001 having a targeted CAB of about 5
trillion, greater than the needed reserves of 4 trillion. The Bank of Japan with time upraised its
anticipated range to 6-7 % of Gross Domestic Product by the start of the year 2004 and sustained
it at that position for several years. This was absolutely well in extra of needed reserves and past

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 4
the aggregate necessary to keep dramatic rates at the level of zero as depicted in the figure
below.
During this duration of QEP, both the 3-month Treasury bill and the uncollateralized call
proportion fell to approximately zero while the ratio of bank loans declined steadily. The Bank of
Japan officially ended the Quantitative Easing Policy in March the year 2006 and returned to the
instant call rates as its target policy. Though, it didn’t increase the call rate until July in order to
permit the current account balances to be exhausted as shown in the figure below (Spiegel, 2014,
p.87).

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 5
Most of the analysts do come into an agreement that the Quantitative Easing Policy was
not that very effective in realizing its objective of encouraging amassed demand adequately to do
away with the persistent deflation. (Shirakawa, 2012,p.129) .Ensuing the shallow financial crisis
which took place between the years 2001 and 2002, Japanese Gross Domestic Product growth
was put into a solid but dull position insufficient to lift the price rises from the negative zones as
indicated below.

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 6
The argument that the Quantitative Easing Policy failed to realize its crucial objective of
eradicating deflation, though, didn’t show that it delivered no spur to Japanese economy. It’s
probable that the QEP put forth positive impacts, but simply overcome by the setback on the
aggregate expenditure which resulted from the severe weaknesses in the area of banking and the
balance sheet snags amid of both the households and the firms (Spiegel, 2014, p.87).
There are several ways by which the Quantitative Easing Policy motivated expenditure.
To begin with, BOJ’s absolute purchases of JGBs contributed in lowering the long-term rates of
interest, despite the fact that the existing investigation does not show its impacts, simply because
the acquisitions were not adequate (Shirakawa, 2012, p.156). Secondly, by compelling to
maintain the rates of interest low up to when the end of deflation period, QEP abridged the likely
prospect interest rates and lowered the insignificant long-term proportions, while amassing the

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 7
anticipated inflation and lowering the actual interest rates. These effects were though relatively
small (Spiegel, 2014, p.87).
Finally, QEP functioned through the credit channel of the economic policy to increase
the liquidity of financial institutions so that they stretched their lending supply and making loans
more accessible to bank-hooked on borrowers, good motive to rely on Japanese financial
institutions may have wanted supplementary liquidity. Shirakawa (2012) pointed out that while
demand for extra reserves declined shortly after the year 2001 terrorist occurrence, in most
established nations, demand remained considerably great in japan owing to apprehensions over
commercial bankruptcies as well as the declining equity prices. Kimura et al (2013) likewise
argued that enabling liquidity had a steadying effect on the monetary markets and possibly
induced a portfolio move which led to credit extension.
The Theory of QEP and Negative Interest Policy based on Japanese Experience.
Making use of a two- period overlapping generations’ model, this research revealed how
the quantitative easing policy affects an economy based on the above scenario of Japanese
economy. Since QEP forced a huge amount of money notice (Kurihara,2012,p.47) Consequently,
the rate of return for money went up. This implied deflation acceleration in Japan, which was in
line with the reality. On the other hand, QEP stimulated the aggregate demand which brought
about a mild recovery in business. This business upturn tightened the foreign market by
increasing the imports and caused the home currency to depreciate. (Fawley and Neely, 2012,
p.154).

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 8
Negative Interest Policy depicts that there is tax imposed on money hoarding and as long
as the government spending is maintained constant, money circulation obviously declines,
thereby discouraging businesses. Such a recession reduces cumulative earnings and imports. This
prompts excess supply of foreign exchange and consequently leading to appreciation of the
exchange rate to bring the market into equilibrium. These characteristics of business cycle in
reference to the changes in the monetary authority decisions became entirely consisted with the
Japanese experience under the Abenomics. (Fawley and Neely, 2012, p.128).

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 9
The two- period overlapping generations’ model
Considering a two period overlapping-generations model of a production
economy with vast time horizon, this economy under a supple exchange rate
consumes two types of goods: goods, x, in which the economy major in; goods,
y, which are manufactured in the rest of the world and circulated
internationally. Assuming that one unit of labour produces one units of goods,
x, and the opportunity to work which also means a chance to earn income is
restricted within the young age bracket (Fawley and Neely, 2012, p.133).
There are two assets ensuing to no nominal interest: these assets are home
and foreign currency. Goods in each economy are only available by its own
currency. An assumption is made that no individual has inheritance motive
and the balance of payments is always maintained at equilibrium. Precisely,
the excess balance of payments denotes that the old generation of home
economy bestows the foreign currency to their heirs because global loans
between the same generations are infeasible by the harmonization of earning
opportunity. (Fawley and Neely, 2012, p.154).
In the contrary case, when the balance of payments falls in debit the old
generation turns out bankrupt and thus normal young individuals never sell
their produced goods in advance. This model considers two sectors of the
economy; individuals and Firms. ( Shirakawa, 2012,p.113)

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 10
Individuals
The utility function U of citizens of this economy is similar:
Where is the composition of goods consumed by the i-th stage during
period t and are the consumption of home and foreign goods
respectively. denotes the disutility of labour. is a definition function
taking unity value when a person is employed and zero when a person is
unemployed.u(.) is awell-behaved and homothetic value function. (Fawley and
Neely, 2012, p.154).
An elementary calculation leads to the expenditure function, :
Where represents the price of home goods during the period t, and is
that of foreign goods . πt denotes nominal exchange rates. From the linear
homogeneity of expenditure function, the 2nd equation can be changed into

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 11
Where et represents the real exchange rate during the time t and is the
inflation rate in terms of home goods. To abbreviate the adjustment process
an assumption is made that home economy is stationary i.e.
The 3rd equation above can be rewritten as
Firms
Every firm is assumed to be a price taker and faces the linear homogenous
production function on its own; profit becomes zero in the state of
equilibrium. Therefore, the equation below is obtained (Wieland, 2011,
p.123).
Where is the nominal reservation wage, as confirmed by the right hand of
the above equation.

IMPLIMENTATION OF QUANTITATIVE EASING POLICY 12
The above equation outlines the participation limitation for individuals. It
implies that every time the home currency devalues disinflation advances.
(Joyce et al, 2015). This is because such depreciation deprives the people
responsible for expensive import goods; hence, the inflation rate in terms of
the home goods should be calmed to cater for this disadvantage. As a result,
foreign business cycle circulates through an adjoining variation in relation to
trading activities.in this case, the employment segregation effect is
unsatisfactory even though the balance of payments is always in equilibrium
as (Fawley and Neely, 2012) emphasize in a more undeveloped model.
Based on the two period overlapping-generation model of a production
economy, the following results were realized.
The radical QEP not only encourages an economy but also quickens deflation.
This is because of a rapid monetary extension which requires a higher rate of
return for a widely demarcated liquidity. Additionally, the higher income in
relation to boom upsurges the import demand and In order to equilibrate the
foreign currency market, the actual exchange rate depreciates. (Fawley and
Neely, 2012, p.154).
The Taylor theory, zero inferior bound, and two stable states
As revealed by Joyce et al. (2015), two stable situations occur when the Taylor rule
becomes non-linear as a result of the zero inferior bound on the rates of nominal interest: an