Tag: quantitative easing

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Easing the economy ‘quantitatively’

Economists never like to use simple words when there are more complex ones available! So, the new term for printing money is ‘quantitative easing’. This refers to deliberate increases in the money supply aimed at preventing deflation. The real concern is whether quantitative easing will stoke up inflationary pressures for the future – the balance between inflation and deflation is a fine line to tread. Quantitative easing becomes necessary when there is danger of deflation and interest rates have already been cut as far as is possible.

Another problem, in the short term, is that an increase in the monetary base may have little effect on broader money (M4 in the UK) if people do not want to borrow and thus credit creation is limited.

The articles below all look at various different aspects of quantitative easing.

Europeans Disagree Drastically On Fed Rate Cut Deutsche Welle (17/12/08)
Financial crisis: Free money coming your way! Telegraph (17/12/08)
Wondering what on earth Nils was on about? He’s written this for you BBC News Online (PM programme) (18/12/08)
Japan forecasts no growth in 2009 BBC News Online (19/12/08)
New economic policy: If you haven’t got enough of this stuff, just print some more Scotsman (18/12/08)
Ground Zero The Economist (18/12/08)
Fed throws out the rulebook Times Online (18/12/08)
Quantitative easing: the modern way to print money or a therapy of last resort? Telegraph (8/1/09)
Forget hard choices. We need pampering Times Online (18/12/08)
Jeremy Warner: Darling wants say on ‘quantitative easing’ Independent (8/1/09)

Questions

  1. Define the term ‘quantitative easing’.
  2. Explain the mechanism by which the monetary authorities can implement a policy of quantitative easing.
  3. Discuss the relative effectiveness of cuts in interest rates and quantitative easing to boost aggregate demand in a recession.
  4. Analyse the impact on an economy of a prolonged period of deflation.
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The Bank of England – pouring in liquidity

A key determinant of the credit crunch was a shortage of liquidity and a breakdown of the interbank lending market. In an attempt to ease the credit situation and restart the interbank lending market, the Bank of England auctioned over £40bn of credit at the end of September. The aim of this was to boost the liquidity position of the banks.

Central banks pump billions into system Guardian (27/9/08)
Bank of England pumps £55bn into credit markets Times Online (26/9/08)
Where has all the money gone? BBC Magazine (15/10/08)

Questions

1. Explain why the Bank of England needed to boost liquidity in the money markets.
2. Using diagrams as appropriate, show the impact of this increase in credit on the money markets. What constraints does the Bank of England face in ensuring that it achieves the desired outcome?
3. Discuss whether the approach of raising liquidity is likely to be more or less effective than a change in the regulatory framework.