Quantitative Easing (QE) is an alternative policy used by the central bank to increase the money supply to the banks, which results in lower interest rates. When the interest rates are low, many individuals, firms, and other enterprises tend to borrow money from the banks to hire more employees and expand their ventures, which increases the money supply (Krishnamurthy & Vissing-Jorgensen, 2011) . This policy accelerates boosting the economy, as many people acquire affordable loans they use for development and business expansion. This process allows the central bank purchases government securities, bonds and assets from the private sector to create the need for loan acquisition. Simultaneously, it encourages the banks to lend more money to the consumers, as their financial limit is also raised. For this assignment, we evaluate the limitations of QE and some of the instances where the policy had to be applied around the globe.
Quantitative Easing Limitations
In the implementation of QE policy, the central bank is faced with several limitations which somehow hinder the achievement of the purported purpose of the policy. One limitation is that the central banks are independent institutions and not even the governments can interfere with their operations. In this case, the central bank cannot compel banks to loan out money to individuals and firms once they receive it. When the money does not end up to the consumers, it means that the policy won't be effective in economy stimulation.
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Secondly, in countries where the bond yields are already low such as the U.S and U.K, the implementation of the QE could end up inefficient, since there is no much scope of reducing the yields further (Joyce, et al 2011) . This is because, the borrowers are used to all time low lending rates, thus, lowering the yield further may only end up hurting the economy. In this case, there could be no need of the implementing the policy, because of the possible negative impact, which is not the purpose of the implementation.
Thirdly, in a country like the U.K where about 30% of bond holders are the foreign financial corporation, buying of the bonds by the central bank from them mean buying mainly from foreign investors, which would not be an effective measure in the economy stimulation in the country (Joyce, et al 2011). The domestic financial institutions are considered as primary facilitators in the implementation of QE since they are ran domestically and all their returns going back to the government, while solely benefiting the residents.
Fourthly, during the recession when there are reduced trade activities, and the bond yields are low, the banks shy away from risking leading to firms and prefer working with private sectors who provide security for the low bond yields. This is because, in the case of double-dip recession, the investment will derail to a risky position. In this case, the implementation of the QE may suffer set back due to the lack of confidence in the prediction of the nature of economy.
Lastly, the study shows that most of the people suggest that instead of the central bank buying bonds indiscriminately, the QE would be integrated with the government banks that make lending to small firms, which will be an effective way of ensuring that the money created reaches the consumers.
History of Implementation
Qualitative easing policy has been in the use for long in many countries around the world. For instance, in 2007-2008, following the global financial crisis which affected most of the countries in the world, countries such as U.S and U.K implemented several rounds of QE in the effort of keeping their economy at check. The policy has also been implemented severally by Japanese and European banks in the recent past, in the effort of reviving and improving their economies.
Conclusion
The Qualitative easing policy attempts to revive the economy when it is at stake. The central bank ensures that there is enough money supply to the consumers, which are lead by the banks at a very low interest. However, the effort to revive the economy by use of the QE can face many limitations which may render the effort inefficient. Some of the limitations include; the willingness for the banks to lend out the money, some of the countries already have a low bond yield, domination of the foreign investors in the financial corporation, and recession inconvenience. This policy, however, is significant in the economy intervention in the times when the economy of a country is at stake.
References
Joyce, M., Lasaosa, A., Stevens, I., & Tong, M. (2011). The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking , 7 (3), 113-161.
Krishnamurthy, A., & Vissing-Jorgensen, A. (2011). The effects of quantitative easing on interest rates: channels and implications for policy (No. w17555). National Bureau of Economic Research.
http://www.economicshelp.org/blog/4682/economics/problems-of-quantitative-easing/
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