Prepared by:
Sayed Hossain, Phd in Economics
Collin College, Texas.
March 28, 2014
Personal website : www.sayedhossain.com
www.sayedhossain.com
Quantitative easing, qualitative easing and inflation
20 Minutes Presentation
Types of monetary policy
1. Traditional monetary policy
2. Quantitative easing and qualitative easing.
Traditional Monetary Policy
S
Rate of interest
10
7.5
i
5
D
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
S1
S
Rate of interest
10
7.5
i
5
D
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
S
Rate of interest
10
7.5
i
5
D
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
Traditional Monetary Policy
S
S2
Rate of interest
10
7.5
i
5
D
2.5
0
0
50
100
150
200 250 300
Money demanded
(billions of dollars)
What is quantitative easing?
Quantitative easing (QE) is an unconventional
monetary policy used by central bank.
Under QE, central bank purchase long term bond
to reduce long term interest rate.
What is qualitative easing?
Quantitative easing is an expansion of a central bank's
balance sheet.
Qualitative easing is a process of Central Bank to add
riskier assets to its balance sheet. As a result, average
quality of assets decreases.
Importance of qualitative easing
FED purchased riskier assets such as mortgage backed
securities that helped to revive stock market in 2009.
Importance of qualitative easing
Qualitative easing adopted in the European Union
throughout the early 21st century.
European Central Bank purchased bond issued by
troubled countries like Greece and Italy.
As a result, average quality of assets of European
Central bank went down but it had positive impact on
Eurozone.
Why Quantitative Easing in USA?
As Fed Fund Rate has gone down to Almost Zero
Percent but fails to bring expected results, FED has
targeted Long Run Rate under QE Program to reduce
long run rate to boost spending.
Traditional Monetary Policy VS Quantitative Easing
The targets of both the Traditional Monetary Policy
and Quantitative Easing are to increase Money
Supply and boost Spending.
Traditional monetary policy targets Fed Fund Rate
while QE is targeting Quantity of Money.
The Traditional Monetary Policy targets Short Run
Rate while QE is targeting Long Run Rate to
enhance Spending.
Traditional monetary policy is generally implemented
by purchasing Short Term Bond while QE is
implemented by buying Long Term Bond to control
Long Term Cost of Borrowing.
What is the possible adverse affect of QE program?
Answer: Inflation (If it is more than 2 percent)
But in reality it did not occur. Rather inflation gone
down. So, QE needs to be continued.
Positive impact of QE program.
1. Risk of deflation has been tackled so far. Rate of
inflation is close to targeted 2 percent.
2. As the inflation is low, living standard is likely to
go up, upon which invention and innovation largely
depend.
Positive impact of QE program
3. Rate of unemployment is improving, down
to 6.7 percent, will boost spending further.
4. GDP growth is moderate.
5. Stock indices are rising, making households
wealthy. Spending is likely to boost.
The End
Thank you