In the article by Blackstone, dated June 10th, 2019, titled “ Monetary easing long different this time around , the author explores current trends experienced in the global economy and inflation falling below the targets set by Central Banks. The current trends have left economists and investors to wonder how the next quantitative easing cycle will appear. Quantitative easing is meant to increase the money supply through the purchase of assets with newly created bank reserves to enable banks to be more liquid. However, Central Banks in different parts all over different parts of the world respond differently to the current economic challenges, especially by lowering their interest rates. To implement the quantitive easing policy, central increase money supply through purchasing government bonds, and other securities. When the cost of money is lowered, it means lowering interest rates to enable banks to lend with easier terms. However, when central banks increase the money supply through lowering interest rates, this can result in inflation without any economic growth, which ultimately results in a period of stagflation.
According to Blackstone (2019), there are still a number of monetary policy choices for developed and developing economies that are constrained by low and in most instance, negative interest rates. Therefore, faced with the urge to push the interest rates further into the negative territory, most central banks are considering to activate their economies through monetary policies from a very low base. In case most economies globally encounter a soft patch with a slow trend in economic growth with inflation ranging between 1% to 1.5%, this could render policymakers to respond with a mix of limited rate reductions coupled with a commitment to make the monetary policy loose for a prolonged period. Blackstone (2019) states that this is the most probable scenario for most economies. The problem could be that, when global economic growth is retarded, major economies will enter a recession. The situation could subject central bankers to confront the limits of what can be done with a recession, such as the trade wars, which have been witnessed between the United States and China. Also, the problems could escalate to a buildup of corporate debts, increase in home prices, and other assets in developed economies. As a result, the potential bubbles could result in destabilizing ripples, especially when they burst.
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Figure 1: Policy rates of central banks in the Asia-Pacific region and India
In the above scenario, whatever policy measures that global central banks will take to combat the next recession, the solution may not be enough to solve the problem. Therefore, any eventual downturn could be detrimental in case investors get concerned that central banks will not be in a position to correct the situation. For instance, the Chinese central bank recently announced that it would lower the reserve requirement ratio for smaller and medium-sized banks to encourage more banks lending to private smaller businesses ( Blackstone, 2019) . The quantitative easing move was perceived as a sign that the government made a decision to shore up market sentiment, although there have been renewed tensions of trade with the U.S. However, policymakers and economists noted that the Chinese government developed a plan to lower its reserve ratio and encourage banks to offer more credit to smaller businesses. This means that the Chinese central bank may lower open market interest rates to lower financing costs for lelbers. Also, financial markets increasingly observe the US join other world economies that have implemented the monetary policy of quantitative easing.
Several drawbacks are linked to quantitative easing. Most importantly, the policy could cause inflation. Even though central banks are created and regulated by their own countries' governments, they cannot compel banks to increase lending by lowering interest rates ( Christensen & Krogstrup, 2018) . In this case, when the increased money supply, caused by lowered interest rates does not work, the approach may not be effective as a tool to facilitate deficit spending. Next, qualitative easing could result in devaluing of the domestic currency. However, for manufacturers, it may stimulate growth since goods and services exported would less costly in the global market. Nonetheless, a devalued currency may make imports more costly, which could increase production cost and consumer price levels.
There are situations where quantitive easing could be effective. For example, during the qualitative easing programs conducted by the United States Fed Reserve beginning in 2008, there was an increase in the money supply at the tune of $4 trillion. As such, the asset side of the Federal Reserve's balance sheet increased dramatically as it purchased government securities, mortgages, and assets ( Christensen & Krogstrup, 2018) . The main goal was that the banks would have an opportunity to lend in invest in the reserves, which stimulated the economic growth rate. The banks held much money as excess reserves. Indeed, at its peak, the United States central bank held over $2 trillion in excess reserves, which was not expected for the Federal Reserve's quantitative easing program. Most economists believed that the quantitative easing program rescued the economy of the united states, which followed the 2008 financial crisis. Although, the extent os its contribution in the following recovery has been not easy to quantify.
Several central banks have also made an effort to implement the quantitative easing policy to thwart recession and deflation, but the outcome has been insignificant. For example, following the Asian Financial crisis that occurred in 1997, Japan was caught in an economic recession. By 2000, the BoJ began the strategy of implementing quantitative easing program to eliminate deflation and stimulate economic recovery ( Belke, Gros, & Osowski, 2016) . Besides, the Bank of Japan moves from purchasing government securities to purchasing private debts and stocks. Ultimately, quantitative easing program failed to achieve the intended goals. For this reason, the Bank of Japam governors concluded that quantitative easing program was not effective after a few months of launching it in 2000. Following its implementation, the Japanese GDP declined in nominal terms despite the efforts put in place by the central bank.
In conclusion, the paper discusses a current economic event by examining the effects of a non-standard monetary policy associated with international yield relationship. There is evidence on long term rates preceded with a global downward trend associated with a financial crisis. For this reason, it is not possible to distinguish a significant impact when central banks implement quantitative easing program to increase the money supply. However, there has been a noticeable difference between quantitative easing programs implemented by central banks, with the common aim of placing pressure on long-term yields. For instance, by reducing the long-term yields, the FEDS anticipated to further stimulate economic growth and diminish drastic declined in the inflation rates.
Reflection
Based on the current discussion, I tend to believe that lowering interest rates by increasing the money supply causes inflation. However, the most important aspect that I have learned is that is it not easy to measure the long term effect of quantitative easing on interest rates. Thus, the interest rate relationships coupled with exchange rates are challenging to determine since several assumptions have to be made concerning how asset prices, such as interest rate and the exchange rate would have emerged in the absence of quantitative easing. Also, there is proof that the consequences of quantitative easing depend on how the program is designed coupled with the prevailing economic environment and the structure of a country's economy.
References
Belke, A. H., Gros, D., & Osowski, T. (2016). Did quantitative easing affect interest rates outside the US? New evidence-based on interest rate differentials. New Evidence-Based on Interest Rate Differentials (January 26, 2016). CEPS Working Document , (416). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2723184.
Blackstone, B. (June 10, 2019). Monetary easing long different this time around. The Wall Street
Journal. Retrieved from https://www.wsj.com/articles/monetary-easing-looks-different-
this-time-around-11560219001.
Christensen, J. H., & Krogstrup, S. (2018). Transmission of quantitative easing: The role of central bank reserves. The Economic Journal , 129 (617), 249-272. Retrieved from https://academic.oup.com/ej/article/129/617/249/5250963.
