An Unconventional Choice of Banking Sector: Quantitative Easing in Advanced Economies
Prepare for Professor Suk-Joong Kim
Prepare by Yang Liu 440080590 & Yingwen Jin 430586431
This report will discuss the causes and effects of quantitative easing monetary policy in US, UK and Japan on the basis of some relevant economic data. A brief introduction will discuss the nature of quantitative easing policy. In the US part, the global financial crisis will be analysed firstly, which is the cause of QE policy in US. Then, the influences of this policy, especially for banking industry will be addressed. In 2009, the Bank of England decided to implement the QE in UK as well. In this part, a brief comparison of consequences between US and UK will be addressed. The third part is relevant with Japan, which is the first country that applied QE policy in the world, to solve the asset bubble collapse in 2001. Finally, a brief comparison of US and Japan will be put forward and some summing-up will be argued in the conclusion.
When the economy takes a downfall, the government wants the economy going again. They typically spend more money on the social project to flood the money to the market. Sometimes, it does not work, they will lower the interest rate of lending to encourage more people to borrow the money and stimulate economy. However, when the economy is hard to recover and the banks are experiencing insolvency, cannot make loans anymore, central bank and government seek to figure out another way to reverse the economy downturn. Quantitative easing (QE) policy is unconventional monetary policy that central bank provides extra money to banks or interbank market to achieve low and stable inflation and lower the long-term yield (Joyce, Lasaosa, Stevens& Tong 2011).It usually realized by using non-existed money to purchase government bonds and treasuries to directly inject the money and spur economic growth by encouraging banks to lend money. In recent years, some advanced economies like US, UK and Japan frequently adopt QE to increase the money and stimulate the economy. The effectiveness is different between those countries. If the money supply increases too quickly, bad inflation will destabilise the economy further. The reason for doing QE policy in this project is to discuss the effectiveness of QE in different countries. The problem we are going to tackle is how this policy was processed and how those follow-up impacts affect other economies. 2. QE of US
Global financial crisis
The financial crisis of US that erupted in 2007-2008 had thrown economic around all over the world into the global economic recession. The seed of the crisis was the lending boom of the bank due to the expansion of money base that peaked in mid-2007. The sub-prime mortgages were booming. Because of the economic turmoil, the house bubble began to collapse. And it followed by the breakdown of mortgage and securitized products like CDO and MBSs. The severe situation that banks had to deal with was the credit crunch. The figure one shows the total amount of loans issued recent years of US. There was a substantial decline of loan issued by banks during the period of 2007-2008 (showed in figure 1). Figure 1
Source: Ivashina and Scharfstein (2008), Bank lending during the financial crisis of 2008 During the September-November of 2008, lending was reduced by 27% compare with the prior three-month period and it was 68% lower than the peak of the credit boom of the period of March-May 2007 (Ivashina and Scharfstein 2008). The credit crunch led to the bank insolvency. Central banks began to realize policy rate decreasing and facilitate balance sheets expansion as soon as possible to support credit of other banks after the collapse of Lehman Brothers. Monetary Policy
The Fed reserved responded the economic downturn rapidly in 2007. The Federal Reserve...
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