Quantitative Easing

Emily Gu, Fan Liu, Lily Zhang

What is QE?
An unconventional monetary policy when
when traditional monetary policy has bec
ome ineffective.
Buy financial assets from commercial ban
ks and private institutions.
Fed Balance sheet
Asset

liability

Financial assets (bought

from financial institutions)

Reserves

Souce: Zero Hedge

Why is QE necessary?
Monetary Policy at the Zero Lower Bound

Source: The Economics of Money, Banking and Financial Markets. Frederic

S. Mishkin

Source: Economic Research: Federal Reserve Bank of St. Louis

Conventional
monetary policy

Quantitative
easing

focuses on federal funds Further stimulate the

rate
economy when Fed hit
the zero lower bound
(mainly focus on
lowering long-term
interest rate)
Short-term treasury
long-term treasury
bonds
bonds and other
securities, like
mortgage-backed
securities

How does QE work?

Transmission Mechanism and Channels
1. Portfolio balance channel
2. Signaling channel
3. Market liquidity
4. Confidence channel
5. Bank lending

Theoretical effects

QE1, QE2, QE3

Fed
announced
purchase of
$6 billion
MBS

Nov
2008

QE 2
$600 billion
Treasury
securities.

June
2010
Fed halted
purchase.
$2.1 trillion in
total.

Nov
2010

Sep
2012
QE 3

Dec
2012
Additional
$85 billion

Oct
2014
End

Unemployment, Consumption, Investme

nt

Source: Economic Research: Federal Reserve Bank of St. Louis

Unemployment

Source: Economic Research: Federal Reserve Bank of St. Louis

Inflation

Source: Economic Research: Federal Reserve Bank of St. Louis

Mortgage Rate

Source: Economic Research: Federal Reserve Bank of St. Louis

Housing Index

Source: Economic Research: Federal Reserve Bank of St. Louis

Stock Market

Source: Economic Research: Federal Reserve Bank of St. Louis

Alternative Unconventional Monetary

Policy
Forward Guidance Shape market expectations
Purchase shares of stock in the open market
Have negative interest rate

Benefits of QE
Put downward pressure on longer-term interest
rates
Support mortgage markets
Help make broader financial conditions more
accommodative
Support the economic recovery

Uncertainties of QE
Hard to obtain accurate estimates of the
effects of QE
Hard to determine the effectiveness of Q
E, since a large portion of NBR sit idle in
the banks balance sheet
No historical case to refer to

Costs of QE in the Long Run

A deterioration in market functioning
May undermine public confidence in the F
ederal Reserve's ability to exit smoothly fr
om its accommodative policies at the app
ropriate time.
Potential risks for future financial stability

Thank you!

Work Cited
What Is Quantitative Easing: Defined and Explained
By: Amadeo, Kimberly. http://useconomy.about.com/od/glossary/g/Quantitative-Easing
.html
Calculated Risk: QE Timeline Update (Calculated Risk: QE Timeline Update)
http://www.calculatedriskblog.com/2012/09/qe-timeline-update.html
Data Tools (- St. Louis Fed). https://research.stlouisfed.org/datatools.html
Quantitative Easing and Its Impact in Japan, US, UK, and Europe
Hausken.K, Ncube.S
How does quantitative easing in the U.S. affect the stock market? (Investopedia)
http://www.investopedia.com/ask/answers/021015/how-does-quantitative-easing-us-af
fect-stock-market.asp