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Abstract
The implementation of quantitative easing (QE hereafter) by multiple countries in the wake of the 2008 world financial crisis provided stability to financial markets and trouble spots in the economy. Keynesian and Monetarists monetary rationalizations do not appear to provide a clear explanation for why or how quantitative easing provides stimulation for the economy, especially when we observe the absence of inflation and liquidity trap after QE. The nontraditional monetary instrument was implemented due to the exhaustion of traditional instruments, and central bankers are now left with the task of unwinding large-scale asset purchases without negatively affecting the economy. As future economic shocks approach, central banks must reduce the size of the balance sheet to increase the effectiveness of monetary instruments. This paper surveys the experience of QE in three major economies: USA, Japan and UK.
Keywords: Quantitative Easing, Monetary Policy, Japan, UK and USA
The Federal Reserve, the central bank of the United States, implemented extraordinary monetary policy actions during the financial crisis of2008 to stabilize credit markets and reduce the impact of a deepening US and worldwide recession. The expansionary monetary policy known as Quantitative Easing (QE hereafter), which was focused on providing increased liquidity to sectors of the ailing US economy, resulted in a dramatic increase in the size of the Federal Reserve's balance sheet, increased the monetary base, and eliminated the effectiveness of the Open Market Operations, the primary tool used to adjust the monetary base. Almost 10 years after the inception of the crisis, the US economy is still recovering, and the Federal Reserve is now transitioning from an expansionary monetary policy to a neutral or potentially contractionary policy. To prevent overheating of the economy and to improve the Federal Reserve's policy flexibility when the next economic shock occurs, the Federal Reserve must reduce the size of its balance sheet. About the same behaviour can be noticed in UK and Japan in terms of expansionary monetary policy application. This paper will explore QE through the lens of monetary theory with a comparison of three countries, further explore implementation in the United States, and explore possible impacts from unwinding central bank assets.
Literature Review
The literature review for this paper is composed of three sections. The first section of...