Allison Dolan, Javier Ramos, Alex Ouligian, Bianca Tomkoria
1 March 2011
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
A monetary policy of central banks that entails
buying bonds and other assets in order to inject
liquidity to the market.
 Process:

 The central bank electronically gives itself a set amount in
its own account.
 Buys bonds and other assets from commercial or
investment banks
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion

Similar but distinct from QE
 Buy sovereign debt
 Stabilize “dysfunctional” market segments
 Restore monetary policy transmission
mechanisms
 3 and 6 month liquidity cycles
 Liquidity re-absorbed through other ECB
operations
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
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Used when interest rates are near zero
When the central bank is willing to risk inflation
When additional liquidity is needed, i.e. to prevent a
liquidity trap
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
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Used by the major central banks during the
2007-2010 Financial Crisis
May 2010 – Securities Asset Programme
2007 – US Fed Quantitative Easing
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
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IMF: QE increased the stability of
international financial markets during the
2007-2010 Financial Crisis
Restore some confidence in financial sector
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
Quantitative Easing

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Possible inflation risks, especially if GDP
growth does not keep up with the new
issuance of debt
Banks and other institutions don’t circulate
the newly acquired cash
Banks invest their cash overseas or in
speculative markets
Prolonged low interest rates may lead to
financial bubbles in the future
Introduction
Asset Purchase Programs
SMP
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ECB balance sheet is more risky in the case of
Euro member default
Banks and other institutions don’t circulate
the newly acquired cash
Banks invest their cash overseas or in
speculative markets
Prolonged low interest rates may lead to
financial bubbles in the future
Decreases fiscal agility of ECB in other areas
+/- of Programs
Risk Mitigation
Conclusion

Escaping inflation…
 Ability to buy cheap imported goods
▪ Eurozone might not be in the best position to do this
because much of member states’ imports are from other
members
 When liquidity goes toward creating an asset
bubble
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
 Balance sheet has to be seen from a central bank perspective
 Preventing future crises and stabilizing markets may involve a
more united fiscal policy
"What Spain advocates is that if we have a
single currency, it's not enough just to
have a central bank, a single central
bank. It's not enough to have a single
monetary policy. We also need to have
a common economic policy"
German central bank
and government are
very much opposed
to this idea
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
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Asset purchase programs have become an
important tool for central banks for
controlling more complex economies
12 – 18 month window to see inflationary
effects
Don’t have much empirical evidence for the
effects of these types of programs
▪ Japan in the 90s only strong case
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion
And now, a lesson from South Park…
How things REALLY get decided at the Fed...
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Chu, Dian L. From Quantitative Easing to Stagflation? The Market Oracle, 2010.
<http://www.marketoracle.co.uk/Article23955.html>. November 02, 2010.
Conway, Edmund. Policy of 'printing’ money is still not yielding results. The
Telegraph, 2009.
<http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5293310/Policy
-of-printing-money-is-still-not-yielding-results.html>. May 07, 2009.
Eurostat Eurozone Annual Inflation.
<http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=
en&pcode=tsieb060>. February 28, 2011.
Inman, Philli. ECB tries to calm markets by promising unlimited liquidity. Guardian,
2010. <http://www.guardian.co.uk/business/2010/dec/02/european-central-bankbonds-jean-claude-trichet>. December 2, 2010.
Iyer, Raman. Jose Luis Rodriguez Zapatero. 2011. Top News Law.
<http://www.topnews.in/law/people/jose-luis-rodriguez-zapatero>. January 31,
2011.
Sharma, Shalini. Angela Merkel. 2009. Top News.
<http://topnews.us/category/people/angela-merkel>. January 13, 2009.
Introduction
Asset Purchase Programs
+/- of Programs
Risk Mitigation
Conclusion