Quantitative Easing

Recently went for an interview and was asked about my views with regards to Quantitative Easing (QE). Found a relatively interesting article with regards to this topic when I started researching about it subsequently.



Did quantitative easing do any good?

QE probably helped end the Great Recession, though we’ll never know for sure

When times are tough, investment is low and unemployment is high, the government — i.e., the central bank — should create money and exchange it for financial assets. If buying government bonds doesn’t do the trick, the bank can buy all sorts of other things — housing-backed bonds, stocks, even houses themselves — until the economy sputters back to life.

The idea that exchanging money for financial assets can overcome a downturn was enthusiastically promoted by Milton Friedman, the great prophet of monetarism. When Japan was in a prolonged slump in the 1990s, Friedman advocated just such a large-scale asset-purchase program: The (Japanese) economy went into a recession. … Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion. (Basically to kick start the economy)

Thus was born the idea of quantitative easing, or QE for short. Japan used the policy in the 2000s, and much of the developed world adopted it during the Great Recession in 2009 and beyond. It was the great triumph of monetarist influence, though Friedman didn’t live to see it.

Then again, we don’t really know how fast the economy would have grown in the absence of QE. And it’s true that the Great Recession in the U.S. didn’t end up being anywhere nearly as severe as the Great Depression of the 1930s. But that could be due to other reasons — many fewer bank failures, more government stimulus spending or simply a more robust modern economy. It’s also true that the United States recovered faster from the shock than Europe did — but again, that might be due to differences in fiscal policy, or to different initial conditions.

To assess the impact of QE on the economy, you need a model. The problem is macroeconomic models are famously unreliable — all of them contain highly-stylized assumptions, and all of them have trouble fitting the data in a number of ways. In fact, many models say QE should have no effect whatsoever.

In other words, we don’t know how much QE boosted the real economy, and we probably never will. But we have learned one very important thing about the policy — it doesn’t lead to high inflation.

Back when QE was beginning, there were widespread expectations of hyperinflation. That makes sense if you think of money as something created by the government — since inflation is a drop in the value of money, it makes sense that printing more money would reduce its value. But despite all the loud warnings, inflation never materialized.

So although we’ll never know how much QE helps the real economy, we do know that it’s not the risk that many once believed. Monetarism may or may not help, but it probably doesn’t hurt. That’s an important lesson for future policymakers. Although QE’s day may be drawing to a close, it looks like it’s a valuable device that should remain in the central bank tool kit.

P.S sincere apologies for not summarizing them in point form or in a way that’s more comprehensible. The reason for not doing so is just that every paragraph on here provides important information, and besides it was really interesting.

SOURCE: Article written by Noah Smith at https://www.japantimes.co.jp/opinion/2017/09/28/commentary/world-commentary/quantitative-easing-good/#.Wz3pqmh95PY

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