Unconventional Monetary Policy: QE
The unconventional monetary policy of quantitative easing (QE) brought about by the Federal Reserve in 2008 was meant to address the Great Recession triggered by the bursting of the housing bubble and the subprime blow-up. Three rounds of QE were initiated, the first from December 2008 to March 2010 in which $600 billion in agency mortgage-backed securities and agency debt were purchased by the central bank in order to add liquidity to the market, ease fears of a collapse, and stimulate the overall economy. In November 2010, the Fed began its second round of QE, this time buying $600 billion in Treasuries. The third round of QE was announced in 2012 and halted in October 2014 after the Fed had accumulated $4.5 trillion in assets on its balance sheet. Prior to the recession, the Fed held only $800 billion of Treasuries on its books. In order to stimulate the economy, the Fed had pumped nearly $4 trillion into the markets. The problem of recession was what QE was meant to solvebut, as Milton Friedman (2013) points, rapidly increasing the monetary supply in a brief amount of time is inflationaryand across asset classes the effects can be seen: the price of gold up, the price of homes up, the price of medicine up, the price of equities up,...
…bull run ten years agounheard of in any other bull market in history).The incentive framework implied by the policy was that so long as the Fed was backstopping the market by purchasing the mortgage-backed securities full of subprime that no one else wanted and by purchasing U.S. Treasuries that no one else wanted, yields would collapse and prices would rise. Investors would have no choice but to get back in in order to obtain the returns they needed. Risk assets (equities) were run up and today they are more expensive than ever before in history, though the fundamentals of many of the underlying indicate that the market is overboughtthanks, of course, to…
References
Friedman, M. (2013). Stagflation was not caused by Cost-Push factors—MiltonFriedman. Retrieved from https://www.youtube.com/watch?v=qQjAbHR40nk
Paul, R. (2009). End the Fed. NY: Hachette Book Group.
Monetary Policy In the United States, the Federal Reserve system is charged with implementing monetary policy (Investopedia, 2013). Monetary policy is essentially any the output of any central bank that seeks to manage an economy by means of manipulating the supply of money in the economy (Investopedia, 2013). The Federal Reserve (2013) defines monetary policy as what it does to "influence the amount of money and credit in the U.S. economy."
Monetary Policy Every economic activity in the United States is related to the policies that are decided by the monetary policies of the nation that are formulated. This involves all activities like purchase of houses, starting up of new business enterprises, and expansion of businesses, investments in new plants or machinery. It also affects our investment decisions like putting our investments in banks, bonds, or the stock market. It is also
" (ECB, 2007) Operational efficiency is held to be the most important of all the principles of operation for the ECB and can be defined as "the capacity of the operational framework to enable monetary policy decision to feed through as precisely and as fast as possible to short-term money market rates. These in turn, through the monetary policy transmission mechanism, affect the price level." (ECB, 2007) Equal treatment and harmonization
Monetary Policy Any change in the central back policy or the bank reserves, which is made to influence the interest rates and thus the investment, employment or production, is called the monetary policy. If the monetary authority wants to increase production, they need to increase the bank reserves. The bank then expands the money supply, which in turn reduces the interest rates. Monetary policy is one of the tools that a
Monetary policy is crucial to the economy and impacts all types of economic and financial decisions individuals make. For example, depending on the state of the economy, individuals may decide whether to obtain a loan to purchase a new car or house or to start their own company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in
Monetary Policy and the Federal Reserve The Federal Reserve ("the Fed") is responsible for formulating and implementing the nation's monetary policy. Monetary policy is government actions to increase or decrease the money supply and change banking requirements and interest rates in order to influence spending by altering banker's willingness to make loans. An expansionary monetary policy increases the money supply in an effort to cut the cost of borrowing, which encourages
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now