The Bank of England has extended its policy of increasing the money supply through the process of quantitative easing. After the May meeting of the MPC, the Bank announced that it will increase the amount of assets it is prepared to buy under the ‘Asset Purchase Programme’ from £75 billion to £125 billion. At the same time the ECB has announced that it too will embark on a programme of quantitative easing. The press releases and articles below consider the details.
Bank of England Maintains Bank Rate at 0.5% and Increases Size of Asset Purchase Programme by £50 Billion to £125 Billion Bank of England News Release (7/5/09) (see also interview with Bank of England Governor)
Press conference by Jean-Claude Trichet, President of the ECB and Lucas Papademos, Vice President of the ECB ECB Press Release (7/5/09) (you can also watch a webcast of the press conference from this link)
Bank of England and European Central Bank extend quantitative easing Telegraph (8/5/09) (see also)
Economy to get extra £50bn boost BBC News (7/5/09)
A QE surprise BBC News: Stephanomics blog (7/5/09)
European Central Bank opts for quantitative easing to lift the eurozone far Times Online (8/5/09)
Fighting recession in the eurozone Financial Times (7/5/09)
ECB dips toe in quantitative easing water Guardian (7/5/09)
Quantitative easing: The story so far BBC News site video
Questions
- Explain how quantitative easing is conducted by the Bank of England and the ECB.
- Examine what determines the effect of quantitative easing on aggregate demand.
- Is quantitative easing the same as open-market operations?
- Explain how quantitative easing is likely to affect exchange rates.
The term hyperinflation is almost an understatement when it comes to describing the level of inflation in Zimbabwe. In July 2008, inflation was estimated to be 231 million per cent. In January 2009, two estimates were made: one of 5 sextillion per cent (5 and 21 zeros); the other of 6.5 quindecillion novemdecillion per cent (65 and 107 zeros). These figures are simply mind-boggling for most people living in low-inflation economies.
Commentators say that prices can double in a single day and this can render banknotes useless very quickly. In fact, local banknotes are scarcely used as people turn to overseas currencies that offer more stability. Recognising this, in late January 2009 the government officially allowed foreign currencies to be used in Zimbabwe as well as the Zimbabwe dollar.
In an attempt to stabilise the currency the Zimbabwean central bank on more than one occasion has tried dropping several zeros from the currency. But this has had little effect and in January 2009 a new series of banknotes was issued, including a Z$100 trillion note. This is unlikely to be the last issue though, but what comes after a trillion?
Zimbabwe rolls out Z$100tr note BBC News Online (16/1/09)
ZIMBABWE: Inflation at 6.5 quindecillion novemdecillion percent IRIN News (United Nations) (21/1/09)
Questions
- Define the term hyperinflation.
- Analyse the main causes of hyperinflation.
- Discuss policies that the Zimbabwean government could adopt to try to reduce the level of inflation in the economy.
- Assess the impact of hyperinflation on the other major macro-economic targets.
- Research another instance of hyperinflation and write a brief summary of the cause(s) and the solution(s). You may find the Wikipedia entry on hyperinflation a good starting point.
Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.
Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford
Questions
- Explain the process by which lower interest rates boost aggregate demand.
- Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
- Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
- Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.
The origins of all economic activity lie in barter. Barter is the exchange of goods directly without the use of money as a medium of exchange. A barter economy is one that uses just barter to organise economic activity. Many subsistence economies will use barter as the main method of trading. We might be forgiven for thinking that, given the sophistication of a modern economy, barter is a long-dead medium of exchange. As the article below shows, we would be wrong. In fact, ironically, the very sophistication that has brought us this economic growth and technical development may also be bringing barter back into fashion. There is a wide range of web sites dedicated to swapping goods and services. Seedy People may not be a website you would immediately think of visiting, but in fact, it is an exchange for gardeners and allotmenteers to swap seeds. The author of the article (John-Paul Flintoff) may have failed to pay his council tax through bartering, but in these cash-strapped times, there may be lots of other opportunities to bypass the conventional market economy.
Money is dead – long live barter Times Online (11/1/09)
Questions
- Identify two weaknesses of organising economic ativity through barter.
- Explain why barter may be coming back into fashion.
- Identify the various functions of money.
- Discuss the implications for economic efficiency of more economic activity being organised through barter.
A key cause of the financial crisis is arguably Maths. Many of the innovations in the finance industry were driven by Maths and a desire to generate higher returns from the money available. The BBC programme, More or Less, looks at the Maths of the credit crunch and considers the extent to which the misuse of mathematical principles may have contributed to the crisis. The links below look at the issues raised by the programme and also give access to the archived audio from the programme.
The Maths of the credit crunch BBC News Online (9/1/09)
More or less – programe summary (9th January programme) BBC News Online (9/1/09)
More or less – programe summary (2nd January programme) BBC News Online (2/1/09)
More less – programme (audio) BBC News Online (9/1/09)
Questions
- Analyse the extent to which quantitative analysis may have been responsible for the credit crunch.
- Consider whether the system of paying performance bonuses to bank traders created a distortion of incentives.
- Explain what is meant by a derivative. Discuss the role that derivatives played in the financial crisis.