Quantitative Easing by BOE and Fed since 2008

Topics: Monetary policy, Central bank, Federal Reserve System Pages: 14 (2705 words) Published: November 5, 2013
ABSTRACT

Following the collapse of Lehman Brothers in
September 2008 financial market turmoils
intensified. Various measures were carried out
to stabilize the financial system. This report
will depict and analyze the quantitative easing
activities of the US Federal Reserve and the
Bank of England as a reaction to the world
financial crisis from 2007 to 2009. The paper
concludes with a critical valuation of the taken
measures and gives an outlook on the future of
the monetary easing.

Quantitative Easing

Table of Contents
Introduction ............................................................................................................ 2 Definition of Quantitative Easing .................................................................................... 2 Potential risks of Quantitative Easing............................................................................... 2 Application of Quantitative Easing by the US Federal Reserve.................................................. 3 Application of Quantitative Easing by the Bank of England...................................................... 4 Critical Valuation and Outlook ....................................................................................... 5 Bibliography ............................................................................................................ 6

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Introduction
After Lehman´s collapse and the bailout of AIG in the mid of September in 2008, liquidity quickly dried up as a consequence of lost confidence within the financial system. Banks were not willing to lend money to each other, even overnight (Putnam, 2013: p.1). Both fiscal and monetary policy measures were carried out to stabilize the financial system as well as the economies. Both the Bank of England and the US Federal Reserve lowered the overnight federal fundsrate to its zero lower bound, facing financial market turmoil, a weak economic outlook and a threat of price deflation. They started to buy longer-term securities to lower bond yields and stimulate economic growth (Christensen and Rudebusch, 2012: p.3). This course of action is referred to as “Quantitative Easing”.

It is the aim of this paper to present and analyze the programs of both US Federal Reserve and Bank of England. Subsequent to a term definition, potential risks of quantitative easing will be exposed. Both programs of the US Federal Reserve and the BOE will be stated. Besides a critical valuation an outlook on the future of the programs will be provided. Therefore newspaper articles, journals and textbooks are taken into account to ensure a solid grounding for a profound analysis.

Definition of Quantitative Easing
Quantitative Easing is a term that became popular in Japan in the 1990s. There is no agreed precise definition on it (Kay, 2013). The process of quantitative easing can be described as follows: QE policies increase the monetary base, in an extraordinary manner (Cobham and Kang, 2012: p.55). According to Mortimer-Lee (2012: p.373) it is used when “monetary conditions in the zero-interest-rate economy are still too high to achieve price stability and full employment.” Asset purchases and lending programs are potential forms of quantitative easing. Programs designed to improve credit conditions, as carried out in the financial crisis, are referred to as credit easing (Tempelman, 2012: p.4). They are a special case of QE if the monetary base is increased as part of it (Fawley and Neely, 2013: p.52). Quantitative easing increases the demand for securities like for example corporate bonds. This leads to lower yields and reduced funding costs for the company when issuing new bonds. It is the aspiration behind quantitative easing that the reduced interest rates will boost investments and consumption, which

is
supposed
to
stimulate
growth
in
the
economy.
In this paper Quantitative Easing is understood as substantial purchases of assets in financial markets in...

Bibliography: Blinder, A.S., 2013. Easing the Angst About Fed Easing. Wall Street Journal - Eastern Edition 261, A15–
A15.
Breedon, F., Chadha, J.S., Waters, A., 2012. The financial market impact of UK quantitative easing.
Christensen, J., Rudebusch, G., 2012. The Response of Interest Rates to US and UK Quantitative Easing*.
Cobham, D., Kang, Y., 2012. Financial Crisis and Quantitative Easing: Can Broad Money Tell Us
Anything?* Financial Crisis and Quantitative Easing: Can Broad Money Tell Us Anything?
Manchester School (14636786) 80, 54–76.
Deutsche Bank, 2013. Fed - zero tapering. [WWW Document]. URL
http://www.dbresearch.de/servlet/reweb2.ReWEB?addmenu=false&document=PROD000000000
Fawley, B.W., Neely, C.J., 2013. Four Stories of Quantitative Easing. Review (00149187) 95, 51–88.
Kay, J., 2013. Quantitative easing and the curious case of the leaky bucket. Financial Times. [WWW
Document] URL http://www.ft.com/intl/cms/s/0/6b0d5268-e7ba-11e2-babb00144feabdc0.html (accessed: 07.10.13)
Mortimer-Lee, P., 2012. The effects and risks of quantitative easing. Journal of Risk Management in
Financial Institutions 5, 372–389.
Putnam, B.H., 2013. Essential concepts necessary to consider when evaluating the efficacy of
quantitative easing
Roubini, N., 2013. Ten QE Questions by Nouriel Roubini - Project Syndicate [WWW Document]. URL
http://www.project-syndicate.org/commentary/the-risks-and-costs-of-quantitative-easing-bynouriel-roubini (accessed 19.10.13).
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Tempelman, J.H., 2012
Tucker, P., Hall, S., Pattani, A., 2013. Macroprudential policy at the Bank of England. Bank of England
Quarterly Bulletin 53, 192–200.
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