Quantitative easing (QE) is a monetary policy of the Central Bank is used to stimulate the economy when monetary policy is no longer effective standards. Central bank implements quantitative easing by purchasing financial assets in the manner specified number of commercial banks or other private institutions, thus raising the price of financial assets and lower yield, and at the same time increase the monetary base (money supply).
This is different from the usual policy of buying or selling short-term government bonds that aim to establish the value of inter-bank lending rate at a specific target.
Expansionary monetary policy (easing) to stimulate the economy is usually carried out by the Central Bank by way of purchase of government bonds with the aim of lowering short-term interest rates in the short term. However, when short-term interest rates already close to or reaches zero, this method can not work anymore. QE can then be used by the authorities to stimulate the economy further by buying long-term assets, thereby decreasing long-term interest rates further.
Quantitative easing can be used to help keep inflation in order not to fall over again at the bottom of the target. This policy is often seen as the final step in an effort to stimulate the economy.
The purpose of QE is to increase the money supply rather than to lower the interest rate can not be lowered anymore. However, if the Central Bank also purchases financial assets are more risky than government bonds, it can cause a decrease in the yield of the asset.
QE will only be applied if the Central Bank has control over the currency used by the country concerned. Central banks in the euro zone countries as a whole cannot take action to increase the money supply so that the policy should be set by the European Central Bank (European Central Bank – ECB)
History of Quantitative Easing
First implemented quantitative easing by the Bank of Japan (BOJ) to fight deflation in early 2000, began on March 19, 2001 Bank of Japan for several years, even until February 2001, states that “quantitative easing” was not effective, and refused to implement the monetary policy. The BOJ has set short-term interest rates at zero level since 1999.
With the QE, liquidity flooded commercial banks to support lending to the private sector, and lead to excessive reserves. BOJ achieve this by buying more government bonds than required for setting interest rates at the zero level. BOJ then do also purchase securities with collateral assets (asset-backed securities) and extend the term of the purchase program.
BOJ to raise commercial bank account balance of 5 trillion yen to 35 trillion yen (approximately $ 300 billion) over a period of four years starting in March 2001, the BOJ also increase the number of long-term Japanese bonds that can be purchased per month.
After the events of the global economic crisis in 2007 – 2008, a similar policy has been adopted by the United States, United Kingdom, and the euro zone. Quantitative easing implemented by countries such as the short-term nominal interest rates are at or near zero. In the United States, this rate is called the federal funds rate, in the United Kingdom called the official bank rate.
At the height of the financial crisis of 2008, the Central Bank of the United States and United Kingdom implementing quantitative easing as a monetary policy that aims to get out of the financial crisis.
THE EFFECTIVENESS OF QE
According to the International Monetary Fund (IMF), the QE policy implemented by the Central Bank of developed countries since the financial crisis of 2008 contributed to the decrease in systematic risk (systemic risk) that occur after the bankruptcy of Lehman Brothers. The IMF also stated that these policies contribute to the restoration of market confidence and the release of the G7 economies from the lowest point in mid-late 2009.
Economist Martin Feldstein argues that QE2 (quantitative easing phase 2) the cause of the rise in the stock market in mid-2010, which resulted in economic growth in the United States in late 2010 Former Federal Reserve Chairman Alan Greenspan calculated that since July 2012 there has been little influence on the economy. Jeremy Stein Federal Reserve officials said that the policy of quantitative easing asset purchases massively large role in supporting economic activity.
Economic Impact of QE
Quantitative easing could lead to a rise in inflation is higher than the targeted amount of easing in the event of excessive and too much money is created by way of purchase of assets.
However, there is the possibility of failure in achieving the goal of QE if the banks remain tight in lending to consumers and businesses. However, QE can impact yields lower. However, there will be time lag between monetary growth and inflation; inflationary pressures with respect to monetary growth caused by QE may occur before the Fed acts to anticipate. Inflation risk will be reduced if the economic development of the system exceeds the speed of increase in money supply due to easing.
When the factors of production in the economy grew because of the increase in the money supply, the value of the currency unit can be increased, even though the currency is available in large quantities in the circulation. For example, if the economy of a state to output at a rate equivalent to the amount of debt, inflation pressure can be neutralized.
This will only happen when banks issue loans, rather than precipitating his money. In a period of high economic output, the Central Bank always has the option to restore the backup level to a higher level by increasing the interest rate or other means, thereby effectively reversing (neutralize) easing measures that have been taken.
Increasing the amount of money supply tends to weaken the exchange rate of the country’s currency relative to other countries, through the interest rate mechanism. Low interest rates led to a lack of foreign interest against the currency, resulting in a flow of capital out of the country, resulting in the weakening of the country’s currency.
This brings advantages for exporters in the country, and low interest rates will also benefit the borrower, because less interest to be paid. But otherwise bring harm to the creditors as yields obtained from fewer loans because interest rates are low. Currency debasement is also bad for importers, as the cost of imported goods is higher due to the devaluation of the currency.