Macroeconomics - Quantitative Easing - Essay Example

Expansionary policies involve the purchase of short term monetary government bonds by the central bank in order to lower the market interest rate. However, when the interest rates are minimal or at zero, traditional monetary policies cannot lower the interest rate any further. In quantitative easing, the economy is boosted by other methods. Short-term as well as long-term bonds are purchased and the yield has a high probability of increasing. (Krishnamurthy and Vissing-Jorgensen, 2011) Quantitative easing is supposed to keep the inflation in check.

However, the goods in the market to be sold have a fixed quantity and therefore, even a flooding of capital will not lead to an increase in the amount of goods and thus, it could actually lead to more inflation (Trefgarne, 2009). The interest rate of the economy is targeted by open market operations, which are the buying and selling of bonds (short-term government bonds) from banks and other financial institutions. The central bank gives out the bonds and collects money from this process, and this in turn also affects the money supply and the interbank interest rate (Wieland, 2009).

When a central bank cannot change the interest rate, they face a liquidity trap, and quantitative easing changes the economy’s scenario without affecting the interest rate. It is only related to the money supply when the interest rate cannot be further lowered. Therefore, it is also a policy that is used as a last resort measure rather than as a first resort one (Wieland, 2009). Also, even though central banks cannot affect the interest rate further, they are the ones who carry out quantitative easing because their money is the one which is acceptable by everyone.

However, in some cases, central banks cannot carry out their own quantitative easing and are dependent on other central banks to carry it out for them (Wieland, 2009). b) UK has a unique method of employing quantitative easing in order to spur growth in the economy and change the money supply and keep the inflation rate in check at about 2%. Their first policy was to buy gilt-edged securities from institutions that are not banks. These also include bonds that are issued by national governments, also referred to as debt securities.

Secondly, they conduct Open Market Operations, which were open to their gilt counterparts as well (Congdon, 2009). The lowest bids started being acceptable by banks, the standard of comparison being the market prices. Lastly, the HM treasury condemned APF (Asset Purchase Facility) which was initiated in 2009, when the commercial paper was financed primarily by T-bills and gilts. There are not only short-term gilts that are used, but also long-term gilts in this process of quantitative easing.

They also borrow money from insurance companies and pension funds. People can also keep more money in their bank accounts than they did before, as one of the ways to boost money in the economy. This way banks, apart from the central bank, will have more money in order to lend more (Congdon, 2009). The two main outcomes of assessing the situation were assessing the portfolios and the events that occurred. Portfolio rebalancing may cause UK investor to demand to go on a hike and gilt’s yield has decreased by a hundred points since this policy has been implemented.

However, it is hard to tell the