Quantitative Easing, recent implementations and the impact on Australia

Topics: Monetary policy, Central bank, Inflation Pages: 14 (3426 words) Published: April 6, 2014
MGSM845
Economic
Context of
Management

Student Name:
Student Number:
Presented to: John-Paul Monck
Date due: 26th August, 2013
Term 3, 2013 Monday Evening CBD
Word Count: 1598

CONTENTS
MGSM845 ECONMIC CONTEXT OF MANAGEMENT ESSAY TERM 3, 2013 ............................. 2 WHAT IS QUATITATIVE EASING ........................................................................................ 2 OBJECTIVES OF QUATITATIVE EASING ............................................................................. 2 RECENT APPLICATIONS AND THEIR SUCCESSES (OR FAILURES?)....................................... 3 THE EFFECT ON THE AUSTRALIAN ECONOMY (AND GLOBALLY) .......................................... 4 APPENDIX A THE LIQUITY TRAP AND OTHER RISKS OF QE AND POTENTIAL SOLUTIONS ................................................................................................................... 6 THE LIQUIDITY TRAP ...................................................................................................... 6 DANGERS, DRAWBACKS AND RISKS OF QUANTITATIVE EASING .......................................... 6 SO WHAT’S THE SOLUTION? ........................................................................................... 7 APPENDIX B QE BOOSTS GROWTH..................................................................................... 8 BIBLIOGRAPHY ............................................................................................................. 9

1

MGSM845 ECONMIC CONTEXT OF MANAGEMENT ESSAY TERM 3, 2013
Describe the monetary policy technique known as quantitative easing (QE). What are its objectives and how successful has it been in recent applications? If the US engages in QE, what effect does it have on Australia?

WHAT IS QUATITATIVE EASING
Quantitative easing is used by central banks to inject the economy with money via the purchasing of securities from the market and is often considered unconventional, sometimes referred to as “printing money”. The desired outcomes of monetary policy are to either promote growth to boost the economy (the aim of QE) or to contract it in times of high or hyperinflation.

Central banks will typically utilise monetary policy through the setting of interbank interest rates. They may also change the amount of money that banks require to keep in reserve through mechanisms like quantitative easing. QE creates an increase in the credit in a central banks’ own bank accounts. This increase in money is intended to be used to purchase “government bonds, equities, houses, corporate bonds or other assets from banks” (Giles).

OBJECTIVES OF QUATITATIVE EASING
Quantitative easing is utilised “when companies and households are focused on reducing debt, interest rates can fall to zero and still growth remains weak as no one wants to borrow” (Oliver, 2012) and “there is still a significant risk of low inflation” (BOE). Quantitative easing changes the focus of the central bank “from targeting interest rates quality to targeting the excess reserves held by banks” (Fawley & Juvenal, 2012). A recession is usually the result of a sharp contraction or weakness in the economy and there is a risk of not enough money circulating. Through an increase in the money base in the economy the objectives of quantitative easing are to reduce the real interest rate and encourage spending. “The BOE’s Red Book states, “the objective of Quantitative Easing is to boost the money supply through large-scale asset purchases and, in doing so, to bring about a level of nominal demand consistent with meeting the inflation target in the medium term”” (Fawley & Neely, 2013).

The main objectives of QE are increased inflation and negative real interest rates. The idea behind this that that people will spend now to beat the price increases driven by inflation, and the reduction in interest rates will result in greater investment. Quantitative easing aims to strengthen confidence and “encourage private sector...

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