Quantitative easing QE ), also known as large-scale asset purchases , is an expansionary monetary policy in which the central bank buys a predetermined amount of government bonds or other financial assets to stimulate economy and increase liquidity. An unconventional form of monetary policy, typically used when standard monetary policy becomes ineffective in the fight against inflation or deflation that is below policy targets. The central bank implements quantitative easing by purchasing certain financial assets from commercial banks and other financial institutions, thereby raising the price of financial assets and lowering returns, while increasing the money supply. This is different from the policy of buying or selling short-term government bonds that are more ordinary to keep the interbank interest rate at the specified target value.
Expansive monetary policies to stimulate the economy typically involve the central bank buying short-term government bonds to lower short-term market rates. However, when the short-term interest rate reaches or approaches zero, this method is no longer functioning. In such circumstances, the monetary authority can then use quantitative easing to further stimulate the economy, by buying more risky assets, or longer overdue, than short-term government bonds, thereby lowering further interest rates on the yield curve.
Quantitative easing can help ensure that inflation does not fall below target. Risks include policies that are more effective than those intended to act against deflation (leading to higher inflation in the long term, due to an increase in the money supply), or ineffective if banks remain reluctant to lend and prospective borrowers unwilling to borrow. According to the International Monetary Fund, the US Federal Reserve System, and various economists, the quantitative easing that has taken place since the 2007-08 global financial crisis has eased some of the economic problems since the crisis.
Video Quantitative easing
Process
Standard central bank monetary policy is usually enacted by buying or selling government bonds on the open market to achieve the desired target for interbank interest rates. However, if the recession or depression continues even when the central bank has lowered its interest rates to virtually zero, the central bank can no longer lower the interest rate, a situation known as a liquidity trap. The central bank can then apply quantitative easing by purchasing financial assets without reference to interest rates. This policy is sometimes described as a last resort to stimulate the economy.
A central bank imposes quantitative easing by buying - regardless of the predetermined interest rate - the quantity of bonds or other financial assets on the financial markets of private financial institutions. This action increases the excess reserves the bank has. The purpose of this policy is to facilitate the expansion of private bank lending; if the private bank increases the loan, it will increase the money supply, although QE directly increases the money supply even without a further bank loan. In addition, if the central bank also buys more risky financial instruments than government bonds, it can also lower interest yields from those assets (since the assets are more scarce in the market, and thus their prices rise simultaneously).
Quantitative easing, and monetary policy in general, can only be done if the central bank controls the currency used in the country. Central banks of countries in the Euro Zone, for example, can not unilaterally decide to use quantitative easing. They should instead rely on the governing council of the European Central Bank (composed of all national central bank governors) to approve the general monetary policy, which they (national central banks) implement.
Maps Quantitative easing
History
Precedent
The US Federal Reserve was late in applying a policy similar to the current quantitative easing during the Great Depression of the 1930s. In particular, the excess bank reserves exceeded 6 percent in 1940, while they disappeared during the postwar period until 2008. Despite this fact, many commentators cite the scope of the Federal Reserve's quantitative easing program after the 2008 "unprecedented" crisis.
Japan before 2007
The so-called 'quantitative easing' policy (??????, ry? Teki kin'y? Kanwa ) was first used by the Bank of Japan (BOJ) to combat domestic deflation in the early 2000s. The BOJ has kept short-term interest rates near zero since 1999. The Bank of Japan has for many years, and until the end of February 2001, stated that "quantitative easing... is ineffective" and rejects its use for monetary policy.
According to the Bank of Japan, the central bank adopted quantitative easing on March 19, 2001. Under quantitative easing, the BOJ flooded commercial banks with excess liquidity to promote personal loans, leaving them with huge stocks of excess reserves and hence less risk of liquidity shortages. The BOJ resolves this by buying more government bonds than is necessary to set the interest rate to zero. It then also buys asset-backed securities and equity and extends the terms of its commercial paper purchase operations. The BOJ increased the balance of a commercial bank's current account from ¥ 5 trillion to ¥ 35 trillion (about US $ 300 billion) over a four-year period starting in March 2001. The BOJ also increased three times as long-term Japanese government bonds can buy on a monthly basis.
After 2007
Since the 2007-08 global financial crisis, policies similar to those done by Japan have been used by the United States, Britain and the Euro Zone. Quantitative easing is used by these countries because the short-term, risk-free nominal interest rate (called the US federal funds rate, or official bank rate in the UK) is at or near zero.
During the height of the financial crisis in 2008, the US Federal Reserve expanded its financial balance dramatically by adding new assets and new obligations without "sterilizing" them with appropriate reductions. In the same period, the UK also used quantitative easing in addition to its monetary policy arm to ease its financial crisis.
US and QE2,
The US Federal Reserve system holds between $ 700 billion and $ 800 billion Treasury notes in the balance sheet before the recession. In late November 2008, the Federal Reserve began buying $ 600 billion mortgage-backed securities. In March 2009, the company held $ 1.75 trillion in bank debt, mortgage-backed securities, and government bonds; This amount reached a peak of $ 2.1 trillion in June 2010. Further purchases stalled as the economy started to improve, but resumed in August 2010 when the Fed decided the economy did not grow strongly. Following the termination in June, ownership began to decline naturally as debt matures and is projected to fall to $ 1.7 trillion in 2012. The revised objective of the Fed continues to hold at $ 2.054 trillion. To maintain that level, the Fed buys $ 30 billion in Treasury notes two to ten years each month.
In November 2010, the Fed announced a second round of quantitative easing, buying $ 600 billion of Treasury securities by the end of the second quarter of 2011. The expression "QE2" became the nickname everywhere in 2010, used to refer to this second round of quantitative easing by banks - the US central bank. Retrospectively, the quantitative easing round before QE2 is called "QE1".
The third round of quantitative easing, "QE3", was announced on September 13, 2012. In the 11-1 vote, the Federal Reserve decided to launch a new $ 40 billion per month, open-ended bond-purchase program from mortgage-backed securities agents. In addition, the Federal Open Market Committee (FOMC) announces that it will likely keep the federal funds level close to zero "at least until 2015." According to NASDAQ.com, this is a stimulus program that allows the Federal Reserve to ease $ 40 billion per month from the risk of commercial housing market debt. Due to its open nature, QE3 has earned the popular nickname "QE-Infinity." On December 12, 2012, the FOMC announced an increase in the number of open purchases from $ 40 billion to $ 85 billion per month.
On June 19, 2013, Ben Bernanke announced the "reduction" of some of the Fed's QE policies relied on sustained positive economic data. In particular, he said that the Fed could reduce its bond purchases from $ 85 billion to $ 65 billion a month during its September 2013 policy meeting. He also suggested that the bond-buying program be closed by mid-2014. While Bernanke did not announce an interest rate hike, he suggested that if inflation follows the 2% target level and unemployment drops to 6.5%, the Fed is likely to start raising interest rates. The stock market fell about 4.3% during the three trading days after Bernanke's announcement, with the Dow Jones down 659 points between June 19 and 24, closing at 14,660 at the end of the day on 24 June. On September 18, 2013, the Fed decided to postpone the scaling of its bond-buying program, and announced in December 2013 that it will begin to reduce its purchases in January 2014. The purchase was discontinued on October 29, 2014 after collecting $ 4.5 trillion in assets.
United Kingdom
During the QE program, the Bank of England buys gilts from financial institutions, along with high-quality relative debt released by private companies. Banks, insurance companies, and pension funds can then use the money they receive to lend or even to buy back more bonds from the bank. Furthermore, the central bank may lend new money to private banks or buy assets from banks in exchange for currency. These measures have the effect of reducing interest on government bonds and similar investments, making it cheaper for businesses to raise capital. Other side effects are investors will turn to other investments, such as stocks, raise their prices and encourage consumption. QE can reduce interbank overnight rates and thereby encourage banks to lend money to agencies that pay high interest and are financially weaker.
Beginning in March 2009, the Bank of England had bought assets of approximately £ 165 billion in September 2009 and roughly Ã,  £ 175 billion of assets at the end of October 2009. At a meeting in November 2009, the Monetary Policy Committee (MPC) voted to increase total purchases assets up to Ã,  £ 200 billion. Most of the assets purchased are government securities (gilts); The Bank has also purchased high-quality private sector assets in smaller quantities. In December 2010, MPC member Adam Posen called for a 50,000 billion expansion of the Bank's quantitative easing program, while his partner Andrew Sentance has called for an increase in interest rates as inflation is above the 2% target level. In October 2011, the Bank of England announced that it would conduct another round of QE, creating an additional Ã,  £ 75 billion. In February 2012 announced an additional Ã,  £ 50 billion. In July 2012, the company announced  £ 50 billion more, bringing its total to Ã,  £ 375 billion. Banks have said that they will not buy more than 70% of any government debt problem. This means that at least 30% of any government debt problem must be bought and held by institutions other than the Bank of England. In 2012, the Bank estimates that quantitative easing has benefited households differently according to the assets they hold; wealthy households have more assets.
In August 2016, the Bank of England said it would buy additional Ã, Â £ 60 billion of British government bonds and Ã, Â £ 10 billion of corporate bonds, to address uncertainty over Brexit and concerns about productivity and economic growth.
Europe
The European Central Bank said that they will focus on the purchase of closed bonds, a form of corporate debt. This indicates that the initial purchase will be worth about EUR60 billion in May 2009.
In early 2013, the Swiss National Bank had the largest balance sheet compared to the size of the economy it was responsible for, almost 100% of Switzerland's national output. A total of 12% of its reserves are in foreign shares. In contrast, US Federal Reserve ownership equals about 20% of US GDP, while European Central Bank assets are worth 30% of GDP.
In a dramatic policy change, following the new Jackson Hole Consensus, on January 22, 2015 Mario Draghi, President of the European Central Bank, announced an 'expanded asset purchase program': where EUR60 billion per month of euro area bonds from central government, agencies and institutions Europe will be purchased. Beginning in March 2015, the stimulus is planned to last through September 2016 at the earliest with a minimum QE total of EUR1.1 trillion. Mario Draghi announces the program will continue: 'until we see further adjustments in the inflation path', referring to the ECB's need to combat the growing deflationary threat across the euro zone by early 2015.
On March 10, 2016, the ECB increased its monthly bond purchases to EUR80 billion from EUR60 billion and began entering corporate bonds under its asset purchase program and announcing a new ultra-cheap four-year bank loan to the bank.
Swedish National Bank launched quantitative easing in February 2015, announcing the purchase of government bonds of nearly 1.2 billion USD. The annual inflation rate in January 2015 was minus 0.3 percent, and the bank implied that the Swedish economy could slide into deflation.
Japan after 2007 and Abenomics
In early October 2010, the Bank of Japan announced it would examine the purchase of assets worth ¥ 5 trillion (US $ 60 billion). This is an attempt to suppress the value of the yen against the US dollar to stimulate the domestic economy by making Japanese exports cheaper; However, it is not effective.
On August 4, 2011 BOJ announced a unilateral step to increase the balance of commercial bank accounts from ¥ 40 trillion (US $ 504 billion) to a total of ¥ 50 trillion (US $ 630 billion). In October 2011, the Bank expanded its asset purchase program by ¥ 5 trillion ($ 66bn) to a total  ¥ 55 trillion.
On April 4, 2013, the Bank of Japan announced that it will expand its asset purchase program by 60 to 70 trillion yen a year. https://www.boj.or.jp/en/mopo/outline/qqe.htm/
The bank hopes to bring Japan from deflation to inflation, with inflation targeting 2%. The amount of purchase is so large that it is expected to double the money supply. This policy has been named Abenomics, as a portmanteau of economic policy and Shinz? Abe, the current Prime Minister of Japan.
On October 31, 2014, the BOJ announced the expansion of the bond purchase program, to now buy 80 trillion Yen of bonds a year.
Economic impact
Effectiveness
According to the International Monetary Fund (IMF), the policy of quantitative easing by central banks of major developed countries since the beginning of the financial crisis of the late 2000s has contributed to systemic risk reduction after the bankruptcy of Lehman Brothers. The IMF stated that the policy also contributed to increased market confidence and declining recession in the G7 countries in the second half of 2009.
Economist Martin Feldstein argues that QE2 caused an increase in the stock market in the second half of 2010, which in turn contributed to a strong increase in consumption and performance of the US economy by the end of 2010. Former Federal Reserve Chairman Alan Greenspan calculates that in July 2012, there was " which is very small to the economy. " Federal Reserve Governor Jeremy Stein said that quantitative easing measures such as large-scale asset purchases "have played an important role in supporting economic activity".
According to Neil Irwin, senior economic correspondent at The New York Times, quantitative easing by the US Federal Reserve may contribute: i) Lower interest rates for corporate bonds and mortgage rates, help support housing prices; ii) Higher stock market valuations, in terms of higher price-earnings ratios for the S & amp; P 500; iii) Increased inflation rate and investor expectations for future inflation; iv) Higher job creation rate; and v) Higher GDP growth rates.
Several studies published after the crisis found Large-Scale Asset Purchases have lowered long-term interest rates on various securities and lower credit risk. The impact is to increase inflation and increase GDP growth.
Exchange rate effect
The increase in the money supply tends to lower the exchange rate of the country's currency against other currencies, through the mechanism of interest rates. Lower interest rates cause capital outflows from a country, thus reducing foreign demand for a country's money, leading to a weaker currency. This QE feature directly benefits exporters living in QE countries, as well as borrowers, as interest rates have fallen, which means there is less money to be paid. However, this is directly detrimental to creditors as they earn less money from lower interest rates. Currency devaluation also directly disadvantages importers and consumers, as the cost of imported goods increases due to currency devaluation.
Reject the falling money supply
In the fractional reserve monetary system the money supply will contract when the bank loan payment (destroying money) exceeds the amount of new extended credit. During the great depression, for example, the money supply fell by about 35%.
Risk
Quantitative easing can lead to higher-than-expected inflation if the required amount of easing is too high and too much money is created by liquid asset purchases. On the other hand, QE may fail to spur demand if banks remain reluctant to lend money to businesses and households. Even then, QE can still reduce the deleveraging process as it decreases yield. However, there is a time lag between monetary growth and inflation; the inflationary pressure associated with the growth of money from QE can be built before the central bank acts against it. The risk of inflation is reduced if the system economy exceeds the rate of increase in the money supply from easing. If production in the economy increases as the money supply increases, the value of the currency unit may also increase, although there are more currencies available. For example, if a country's economy spurs a significant increase in output at a rate at least as high as the amount of monetized debt, inflationary pressure will be equated. This can only happen if member banks actually lend excess money rather than hoarding extra money. During periods of high economic output, central banks always have the option of restoring reserves to higher levels through raising interest rates or other means, effectively reversing the easing measures taken.
Economists like John Taylor believe that quantitative easing creates uncertainty. Because an increase in bank reserves may not immediately increase the money supply if held as excess reserves, an increase in reserves creates a danger that inflation may eventually occur when reserves are lent out.
Impact on savings and pensions
In the European Union, the World Pensions Council (WPC) financial economist also believes that low interest rates on government bonds caused by QE will have an adverse effect on underfunded pension funds, because "without returns that exceed inflation, pension investors face the real value of savings they are decreasing and not increasing in the next few years ".
Capital flight
According to Bloomberg reporter David Lynch, new money from quantitative easing could be used by banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than lending to local businesses that are finding it difficult to get loans.
Increased income and wealth inequality
Criticism often refers to the redistributive effects of quantitative easing. For example, British Prime Minister Theresa May publicly criticized QE in July 2016 because of its regression effect: "Monetary policy - in the form of super-low interest rates and quantitative easing - has helped those on the property ladder at the expense of those who can not afford to have their homes "Dhaval Joshi from BCA Research writes that" QE cash ends enormously in profits, thus exacerbating extreme income inequalities and social tensions arising from it. " Anthony Randazzo of the Reason Foundation writes that QE "is basically a regressive redistributive program that has increased wealth for those already engaged in the financial sector or those who already own homes, but leaving little money for the rest of the economy, the main driver of income inequality."
The critics are based in part on some evidence provided by the central bank itself. In 2012, the Bank of England report shows that its quantitative easing policy has been profitable especially the wealthy, and that 40% of the profits go to 5% of the richest households in the UK.
In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done much for the working Americans.
In response to a similar criticism expressed by MEP Molly Scott Cato, ECB President Mario Draghi once stated:
Some of these policies may, on the one hand, increase inequality but, conversely, if we ask ourselves what is the main cause of inequality, the answer is unemployment. So, as long as these policies help - and they help ahead - then of course the accommodative monetary policy is better in the present situation than the tight monetary policy.
Criticism by BRIC countries
The BRIC countries have criticized the QE conducted by central banks of developed countries. They share the argument that these measures amount to protectionism and competitive devaluation. As net exporters whose currencies are partly pegged to the dollar, they are protesting that QE causes inflation to rise in their country and punish their industry.
Political risk
Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that QE carries "a risk that is considered to be a slippery slope of debt monetization.We know that once the central bank is perceived to target government debt results at a time of persistent budget deficits, concerns about the rapid monetization of debt are emerging. "Later in the same speech, he stated that the Fed monetizes government debt:" The math of this new exercise is readily transparent: The Federal Reserve will buy $ 110 billion a month in Treasuries, an amount that, annually, represents a deficit which is projected from the federal government for next year.For the next eight months, the country's central bank will monetize federal debt. "Ben Bernanke said in 2002 that the US government has a technology called a printing press (or, today, its electronic equivalent), so if the rate reaches zero and deflation is threatened, the government can always act un to ensure deflation is prevented. He said, however, that the government would not print money and distribute it "willy-nilly" but preferred to focus efforts in certain areas (eg, buying federal debt securities and mortgage-backed securities). According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during the recession, and quantitative easing is different from traditional monetary policy "only in magnitude and pre-announcement of amount and time".
Related policies
Qualitative easing
Professor Willem Buiter of the London School of Economics has proposed a terminology to distinguish quantitative easing, or the extension of the central bank's balance sheet, from what he calls qualitative easing, or the central bank's process of adding assets risk to balance sheet:
Quantitative easing is an increase in the size of the central bank's balance sheet through an increase in its monetary obligations (base money), holding a constant composition of its assets. The composition of the asset can be defined as the proportional portion of different financial instruments held by the central bank in the total value of its assets. A nearly equal definition is quantitative easing is an increase in the size of the central bank's balance sheet through an increase in monetary obligations that maintain a constant (average) liquidity and riskiness of its asset portfolio.
Qualitative easing is a change in the composition of the central bank's assets with less liquid and risky assets, holding a constant balance sheet size (and the level of official policy and the rest of the usual suspects list). Less liquid and riskier assets are private securities and instruments guaranteed by the government or guaranteed by their sovereignty. All forms of risk, including credit risk (default risk) are included.
Credit looseners
In introducing the Federal Reserve's response to the 2008-09 financial crisis, Fed Chairman Ben Bernanke differentiated the new program, which he called "credit easing", from quantitative easing of Japanese style. In his speech, he announced,
Our approach - which can be described as "credit easing" - resembles quantitative easing in one respect: It involves the expansion of the central bank's balance sheet. However, in a purely QE regime, the policy focus is the amount of bank reserves, which are central bank liabilities; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period varies considerably, its overall policy stance is measured primarily in terms of targets for bank reserves. In contrast, the Federal Reserve's easing approach focuses on the combination of loans and securities it holds and on how the composition of these assets affects the credit conditions for households and businesses.
Credit easing involves an increase in money supply by purchases rather than government bonds but from private sector assets, such as corporate bonds and mortgage-backed mortgage securities. In 2010, the Federal Reserve bought $ 1.25 trillion mortgage-backed securities to support a sagging mortgage market. This purchase increases the monetary base in a manner similar to the purchase of government securities.
Monetary financing
Quantitative easing has been dubbed "printing money" by some members of the media, central bank governors, and financial analysts. Stephen Hester, chief executive officer of RBS Group, said:
What the Bank of England is doing in quantitative easing is printing money to buy government debt,... So Quantitative easing has allowed the government, this government, to run a huge budget deficit without killing the economy because the Bank of England has financed it.
The Dutch Central Bank itself views QE as a money-making operation:
Eurosystem directly injects money into the economy by buying bonds with newly created electronic money. This is called quantitative easing.
However, QE is a very different form of money creation than is commonly understood when it comes to "money printing". Indeed, the term printing money usually means that the newly created money is used to finance the government deficit directly or to pay off government debt (also known as monetizing government debt ). However, with QE, newly created money is directly used to buy government bonds or other financial assets, central banks in most developed countries (eg, Britain, the United States, Japan and the European Union) are prohibited from buying government debt directly from government and should buy it from the secondary market. This two-step process, in which the government sells bonds to private entities that in turn sell them to the central bank, has been called "monetizing debt" by many analysts. Also, the Federal Reserve has largely "sterilized" bond purchases by paying interest to banks for deposits. This eliminates money from the circulation previously added by Fed bond purchases. The net effect is to raise the price of bonds, lower interest rates on mortgage loans and other loans, without an increase in inflation in the money supply
The distinguishing characteristic between QE and monetizing debt is that with the first, the central bank creates money to stimulate the economy, not to finance government spending (although the indirect effect of QE is to lower interest rates on state bonds). Also, the central bank has the intention to reverse QE when the economy has recovered (by selling government bonds and other financial assets back into the market). The only effective way to determine whether the central bank has monetized the debt is to compare its performance to the stated objectives. Many central banks have adopted inflation targets. It is likely that the central bank monetizes debt if it continues to buy government debt when inflation is above target and if the government has problems with debt financing.
In fact, with the failure of quantitative easing programs around the world, more and more people are appropriately calling for a more straightforward and more straightforward money printing process, including monetary finance for government budgets, helicopter money or "QE for People" (see section below) ).
QE for people
In response to concerns that QE is failing to create enough demand, especially in the euro zone, some economists are calling for "QE for the people". Instead of buying government bonds or other securities by creating bank reserves, as has been done by the Federal Reserve and the Bank of England, some suggest that the central bank can make direct payments to households (in the same way as Milton Friedman's helicopter money). Economists Mark Blyth and Eric Lonergan argue at Overseas that this is the most effective solution for the Euro Zone, especially given the limitation of fiscal policy. They argue that based on evidence of tax cuts in the United States, less than 5% of the GDP transferred by the ECB to the household sector in the Euro Zone will be enough to generate a recovery, a fraction of what is intended to be done under QE standards. Oxford economist John Muellbauer has suggested that this can be legally implemented using a voter list.
On March 27, 2015, 19 economists including Steve Keen, David Graeber, Ann Pettifor, Robert Skidelsky, and Guy Standing have signed a letter to the Financial Times calling on the European Central Bank to adopt a more direct approach. for a quantitative easing plan announced earlier in February.
In November 2015, more than 65 economists supported the 'Quantitative Savings for People' campaign, claiming that "Instead of flooding the financial markets, money created through QE must be released into the real economy, on important public investments such as green infrastructure, affordable and/or distributed as citizen dividends to all residents. "
The ideas were also discussed in the European Parliament on February 17, 2016.
The QE variant for the people is Quantitative Quantitative Saving, a policy proposed by Jeremy Corbyn during the 2015 Labor leadership election, which will require the Bank of England to create money to finance government investment through the National Investment Bank.
Change the structure of debt maturity
Based on a study by economist Eric Swanson reassessing the effectiveness of the actions of the US Federal Open Market Committee in 1961 known as Operation Twist, The Economist has posted that a similar restructuring of the supply of different types of debt would be an effect similar to that of QE. Such actions will allow the finance ministries (eg the US Treasury) to play a role in the process now reserved for central banks.
See also
References
External links
- Credit Policy Loop Tool The interactive graph of an asset on the Federal Reserve balance sheet.
- Deflation: Ensuring "That" Does not Happen Here, Ben Bernanke's 2002 speech on deflation and the usefulness of quantitative easing
- Bank of England - Quantitative Easing
- Bank of England - QE Explains Pamphlets
- Modern Money Mechanics The Federal Reserve Document Explains How Money Is Created
- Quantitative easing is described (Financial Times Europe)
- The Fed Governor Discusses Quantitative Among Between Other Topics
Source of the article : Wikipedia
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