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Quantitative Easing QE

Running head: QUANTITATIVE EASING (QE) 1
Quantitative Easing (QE)
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QUANTITATIVE EASING (QE) 2
Abstract
The quantitative easing (QE) is the unconventional monetary policy actions used in
dealing with severe depression from financial crisis within 2008 to 2009 and 2014. The UK and
the US Fed were in the forefront of implementing the QE approach in the different phases. The
metrics in the paper will include macroeconomic factors, microeconomic factors, employment,
and bank lending among others. The understanding of the QE is critical in promoting economic
productivity and activities to enhance recovery of the UK and US economies. For example, after
the first QE announcement, the unemployment rates started to increase showing the lack of
efficiency in the QE adoption. As a result, the use of QE was not useful in addressing the
economic depression issues.
QUANTITATIVE EASING (QE) 3
Quantitative Easing (QE)
Introduction
Within the occurrence of the 2008 -2009 financial crisis, it created a period of great
depression. To limit the full scale of depression, the Bank of England, and the U.S Fed applied
an unconventional monetary policy action quantitative easing(QE). The expansionary monetary
policy helped the two economies from moving into a severe depression (Williamson, 2016).
Nevertheless, the additional application of QE failed to promote consistent growth as indicated
by the economic downturn in 2012 and later a stagnant economic growth. The increased
utilization of this approach increased the balance sheets and financial status of both central banks
(Mann & Klachkin, 2015). The effect was a creation of a potential negative global economic
effect if the unwinding starts. The long-term adverse implications of QE lead to slow economic
growth showing that QE was not the best response to the Great Recession. The analysis of the
quantitative easing (QE) were effective in the short run, but failed to bring about long term
impacts in the long term to deal with the Great depression.
Employment
In the aftermath of the Great Depression of 2008 to 2009, both UK and US economies
were able to guarantee high level of employment, but in the short run period. The subsequent QE
phases were unable to fully guarantee high employment levels. It is because QE efforts led to
the increases in riskier assets have expanded the employment market forcing businesses to create
more job opportunities to keep up with the higher market demands (Olson & Young, 2015). The
effect of quantitative easing on interest rates and other financial factors were well documented,
but the effects on the employment markets were less documented. Normally, employment is the
last economic factor to recover in the aftermath of a recession (Joyce, Liu, & Tonks, 2015). In
QUANTITATIVE EASING (QE) 4
both the UK and the US, all sizes of businesses were facing the need to borrow funds, which will
help them grow and expand. In quantitative easing phases, there are periods of bond buying,
which make inexpensive money assets. The low rates in both the UK and the US encouraged
corporations to borrow money and expand their businesses that led risk taking activities. 
The employment levels would show the impact of QE in restoring the economies in US
and UK. At the start of the Great Recession, the unemployment rate of the U.S and UK
economies were 10% and 7.7% respectively. From the period, the unemployment levels
decreased steadily to in 2014 to 5.6% and 6.2% in both countries respectively. Olson and Young
(2015) stated that the unemployment levels in the UK were falling to 6%, which was the lowest
rate in 2008. However, the official unemployment rate does not consider the labor participation
rate or the people actively looking for jobs. The rate has reduced from a 2010 rate of 64.8% to
2014 level of 62.7% showing that low people consists of labor force and 5.6% unemployment
rate which may be skewed (Olson & Young, 2015). Similarly, the participation rate in 2015 was
22.2% showing the level of economic inactivity level.
Bank Lending
In the UK, the quantitative easing introduction in March 2009 reduced the Bank of
England's lending rates to a historic low of 0.5% (Melvin, 2016). At the start bank lending was
ruled off as small since banks were deleveraging and reducing the size of the balance sheets.
Without the reduction and quantitative lending, the risk of inflation threatened to undershoot the
2% price index inflation targets (Prescott, 2014). In the US, the interest rate to be paid to lenders
who deposited money into the bank reserves was raised by the Federal Reserve. The move was
contrary to the policy that the Federal Reserve had already stated based on research by van den
QUANTITATIVE EASING (QE) 5
End (2016) on increasing the overall availability of loans in the market. All these moves were
implemented with the introduction of quantitative easing in the US.
In both central banks, the quantitative easing approach was used in purchasing large scale
assets including the private assets such as government treasuries and the mortgage-backed
securities that increases in the level of money supply lowers interest rates and promotes bank
lending (Lee, Li, & Pei, 2015). The approach of QE was useful in trying to enhance bank
lending. Both central banks adopted the QE in four phases from 2009 to 2012 with the Federal
Reserve eliminating off all the purchases starting 2013 (Gordon, 2016). Even though the Fed
bought assets from the government issued debts, Bank of England bought gilts from insurers,
pension funds, and the commercial banks. In the start of 2009, and with financial stimulus in
both nations, the first phase of QE was positive, but the subsequent phases were ineffective.
Price Stability
Both the Bank of England and Federal Reserve have adopted the quantitative easing
policies, which have led to significant increases on their balance sheets. For example, the Bank
of England purchased UK government bonds through its quantitative easing from non-bank
private sectors. The US through the Federal Reserve has not only bought the US treasuries but
also agency-backed mortgages and agency debts in large quantities (Mann, & Klachkin, 2015).
Both these separate purchases were not meant to liquidity problems in the respective banking
systems but to affect the prices of a wide range of assets. Price stability proved vital in
determining the bonds issued to households and companies (van den End, 2016). Most of the
moves made by these two entities have had significant impacts on the government bond yields
although they both are more targeted towards the prices in private sectors.
QUANTITATIVE EASING (QE) 6
Similarly, the price stability is a significant macro element on strengthening economic
growth and performance. In the macroeconomic framework, QE is useful in promoting
investment and spending in private sectors, expanding demand for products and services, and
increasing the prices. Both the central banks focus on the inflation rate at 2% (Bhattarai,
Eggertsson, & Gafarov, 2015). The charts below shows the annual inflation rates from 2009 to
2014.
Source: Melvin (2016).
The first two phases of QE seemed to increase the price levels above 2% target that peaks
at 2011 that correlates with the downward movement in output as shown by the past graph
(Melvin, 2016). The price levels have been reducing significantly in the UK and remain flat in
the U.S showing the weak consumer demand.
Private Sector Impact
The UK and the US have had severe balance sheet recessions since the private sector is
deleveraging massively despite negative interest rates since the asset bubble bursting. The
QUANTITATIVE EASING (QE) 7
private sector has been deleveraging due to the collapse of bubbles that were debt-financed that
left it with huge overhanging debts. Despite the banks having unlimited opportunities to inject
liquidity into the banking sector, the money only enters the real economy when the banks lend
money (Joyce, et al., 2015). The deleveraging private sector means that the liquid funds cannot
enter the economy due to the absence of borrowers. Even though quantitative easing has the
advantage of unlimited liquidity, when it comes to the private sector this liquidity is trapped, and
real money cannot be utilized in the respective economies.
Domestic & Foreign Currency Impact
In the US quantitative easing is credited with the recorded falls in the US interest rates.
The credit is misplaced since the rates also fell in Euro Areas where quantitative easing was not
introduced until recently. Although Gordon (2016)’s studies show that quantitative easing has a
very strong impact on the interest rates of countries where it is implemented, an example being
the UK, foreign long-term interest is still highly correlative. It has very little effect on foreign
currency interest rate differentials which explains why the asset purchases by the Bank of
England and Federal Reserve have had very little effect on the exchange rates (Williamson,
2016). Domestically, the effects of these large asset purchases are not clearly understood. The
quantitative easing differs from changing economic variable relationships to conventional
interest rate hikes. Both the U.S dollar and UK pounds were affected adversely due to the
financial crisis and the great depression. The adverse nature of the great depression affected the
U.S and UK foreign currencies and exchange rates with other currencies.
Commodity Prices
The reviews of commodity prices were critical in understanding the impact of QE.
However, they were unable to gain full employment and price stability within the economic
QUANTITATIVE EASING (QE) 8
growth period (Joyce et al., 2015). Reviewing the macroeconomic and microeconomic figures 0f
2008-2014, it is clear that the first application of QE together with the respective fiscal stimulus
lead to growth in the economic growth and expansion of both economies. According to Joyce et
al. (2015), the commodity price levels are a good indicator of the performance and long-term
economic expansion. The macroeconomic and microeconomic figures were useful in promoting
long-term economic growth. The commodity price actions also relate to the overall aggregate
price changes and inflation. Apart from the commodity prices, annual growth of inherent home
sales is another metric that can be used to measure consumer demand. 
Gross Domestic Product
In the implementation of the first phases of QE, the gross domestic products of both
economies were growing, until they started slowing down in the after years. In the U.S, Braun
(2016) explained that in both QE phases implemented by the U.S Fed, the price of the
commodities increased by more than 25$ (Jarrow & Li, 2014). Nevertheless, the announcement
of QE 3 in 2012, the commodity prices had declined as a show that the largely promoted through
economic cycles rather than the actions and strategies of central banks. Jarrow and Li (2014)
explains that the assets have enjoyed increased liquidity levels in the equity markets. It is
because the commercial banks were able to take new money, buy assets and used it to replace the
money given to the U.S central bank. In the UK economy, the equity prices increased but later
declined in 2010 QE reporting.
Fiscal Policy/Economic Stimulus Impact
While examining the economic data, the QE seemed to offer positive economic recovery-
targeted, but it cannot be maintained. In the U.S economy, it would be attributable to
contradictory monetary and fiscal policies. From the start of Great Recession, the integration of
QUANTITATIVE EASING (QE) 9
fiscal and monetary policies was useful in promoting strategic aspect (Palley, 2014). Without
proper QE1 and integration of combined fiscal stimulus, the great recession would have
increased. Nevertheless, as the economy recovers, the fiscal policy shifts towards restraint in the
economy.
Microeconomic Factors
To determine the reasons for the economies failure to experience sustained growth, it is
vital to review the key microeconomic factors that review the behavioral aspects in the private
sector. As Hsu and Liu (2016) explain, the focus of QE was to lower the level of interest rate
risks emerging by private investors and thus reducing the long-term interest rates. Theoretically,
the reduced interest rates motivate the banks to lend more money to consumers and firms hat
increase the demand for huge ticket assets such as homes and cars. An increase in the demand
for products usually drives the prices high, and the inflation rates increase too. Williamson
(2016) explains that the normal model of the economy has been nonperforming due to the
financial crisis. During the same period, tighter credit measures helped to reduce the lower
income customers from continued borrowing. The graph below is a trend of existing home sales
in the U.S from 2008 to 2012.
Source: Williamson (2016)
QUANTITATIVE EASING (QE) 10
Within the expansion of money supply, the expectations would support an increase in the level of
demand for existing homes. Apart from an upward trend in 2013, the inherent home sales
remained constant with a slowdown in 2014.
Macroeconomic Factors
To review the impact of QE in both nations, it was critical to evaluate the both
macroeconomic information that determines the aggregate effect and microeconomic figures to
explain how individual sectors of economies influenced overall economic growth. The annual
growth levels were vital in understanding the impacts of the great depression on the long-term
economic growth and expansion levels. The annual growth figures and data for both economies
including UK and US including;
Source: Palley (2014).
The expected outcomes of QE were critical in maintaining growth, but the charts show
the four phases of QE that did not deliver those results. 
Conclusion
QUANTITATIVE EASING (QE) 11
In summary, it is clear that the central banks of nations, US and the UK implemented QE
with the intention of promoting short-term recovery and stability of the prices. During the period,
both the fiscal stimulus and monetary policy was useful in helping the economies from dipping
into the full-scale economic depression. Nevertheless, the economic data and figures in the last
periods show that the economic recovery was slow and still headed for another downturn.
Moreover, there is the probability of global recession that could lead to the unwinding of the Fed
and increase in the interest rates. The four phases of QE in both the UK and US were not
appropriate approaches to Great Recession and could enhance financial instability. As a result,
the QE implementation was not effective in dealing with the economic downturns in 2008 to
2014.
QUANTITATIVE EASING (QE) 12
References
Bhattarai, S., Eggertsson, G. B., & Gafarov, B. (2015). Time consistency and the duration of
government debt: A signalling theory of quantitative easing (No. w21336). Washington,
DC: National Bureau of Economic Research.
Braun, B. (2016). Speaking to the people? Money, trust, and central bank legitimacy in the age
of quantitative easing. Review of International Political Economy, 1-29.
Gordon, I. R. (2016). Quantitative easing of an international financial centre: how central
London came so well out of the post-2007 crisis. Cambridge Journal of Regions,
Economy and Society, 9(2), 335-353.
Hsu, F. J., & Liu, I. C. (2016). Quantitative easing and default probability of corporate social
responsibility in US. Applied Economics Letters, 1-5.
Jarrow, R., & Li, H. (2014). The impact of quantitative easing on the US term structure of
interest rates. Review of Derivatives Research, 17(3), 287-321.
Joyce, M. A. S., Liu, Z., & Tonks, I. (2015). 7 Institutional investor investment behaviour during
the Crisis and the portfolio balance effect of QE. Quantitative Easing, 63.
Lee, T., Li, Z., & Pei, Z. (2015). Quantitative Easing and Its Global Impacts. Open Journal of
Social Sciences, 3(03), 18.
Mahajan, A. (2015). Quantitative easing: A bllessing or curse. Advances in Management and
Applied Economics, 5(2), 77.
Mann, C. L., & Klachkin, O. (2015). Has quantitative easing affected the US Treasury auction
market?. Atlantic Economic Journal, 43(1), 135-146.
Melvin, M. (2016). Global Investment Environment of the PostQuantitative Easing World: The
‘newold’and ‘newnew’Normal. Pacific Economic Review, 21(3), 255-275.
QUANTITATIVE EASING (QE) 13
Olson, E., & Young, A. T. (2015). Discretionary monetary policy, quantitative easing and the
decline in US labor share. Economics and Business Letters, 4(2), 63-78.
Palley, T. I. (2014). Monetary policy in the US and EU after quantitative easing: the case for
asset based reserve requirements (ABRR). Real World Economic Review, 68, 2-9.
Prescott, E. C. (2014). Interest on reserves, policy rules and quantitative easing. Journal of
Economic Dynamics and Control, 49, 109-111.
van den End, J. W. (2016). Quantitative easing tilts the balance between monetary and
macroprudential policy. Applied Economics Letters, 23(10), 743-746.
Williamson, S. D. (2016). Scarce collateral, the term premium, and quantitative easing. Journal
of Economic Theory, 164, 136-165.

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