Quantitative Easing Monetary Policy - Article Example

Quantitative Easing Monetary Policy Monetary policy is the effect pledged by the Federal Reserve to control the availability and cost of money and credit included in as directives, policies or statements that influence and shows by what extends the future is discerned. Central bank always put into effect the formal monetary policy so as to reinforce the economy and it reduces the short term interest rates in order to urge more loaning and disbursement. When the interest rates are at or close to zero bound situation, the policy can no longer be executed but instead the central bank involves quantitative assistance so as to improve the economic recovery thus the quantitative easing is a monetary policy used to impede the money supply falling when the standard policy turn to ineffective. This policy important in raising the export market but has also effects on the export market and money depreciation of the given currency. Quantitative easing monetary policy intends to increase the money supply which can no longer be decreased further and can only be carried out with controlled currency thus affecting both money depreciation and exportation in both positive and negative ways. Firstly, the policy is used to increase bank reserves via the central bank liquidity appliances and are absolutely executed as it depends on the ordinary channel of credit creation which reduce the risk of bank runs and does not pose any exit problems (Klyuev, De Imus and Srinivasan 9).Creating a habit of energized trades based on pure essential fundamentals’ is an outstanding way for traders to raise their probability of success and produce consistent profitability. It also allows purchases of long term securities that operate with minimal credit risks since it sends a signal that the central bank desire to lower the long term rates thus it’s a way to commit to an accommodative opinion since it will take time to unwind. The policy allows one to borrow by providing credit in a direct manner to end borrowers which is more impressive than going through banks when banks’ role and /or readiness to lend are impaired. This is possible since the inflammatory pressures must be equalized by means of lending out the money and the bank has the possibility of restoring reserves to higher levels. This will furnish a powerful signal to the market participants since the bank is ready to go to large extensiveness to resuscitate the economy. The central bank can be highly specific in effect intending to achieve important and distressed markets. Quantitative easing is also beneficial when used as a device to create inflation in order to evade deflationary periods in the economy leading to rapid economic recovery after extended recessions (Yotov 64). The quantitative easing policy greatly contributes to the act of diminishing systematic risks that may arise at the zero bound condition. It causes improvements in marketing certainty and provides a foundation of the recession of the economy where the increase in stock market leads to increased consumption and thus strong performance of the US economy. The improved market strategies are used to raise the levels of the economic status by trying to earn more money on the available goods that give rise to profitability opportunities thus saving the economy (Klyuev, De Imus and Srinivasan 13). The most crucial disadvantage of quantitative easing is that it is the main cause of income inequality because the quantitative easing cash ends up in a decisive manner of profits intensifying the already existing income inequality. This policy generally benefits the wealthy because of the social tensions that arise from its implementation. Another disadvantage is that the policy is carried out by the central banks of the developed countries resulting to protectionism and competitive devaluation. It is a practice of girding domestic industries of developed nations from foreign competition since the net exporters whose currencies are prejudicially strengthen with a wedge to the dollar protest that quantitative easing causes inflation rise in their countries thus give a penalty to their industries causing criticism to the undeveloped or developing countries (Committee, Great Britain, Parliament, House of Commons and Treasury 47). The increase of money supply tends to reduce the value of the available currency’s exchange rate compared to others which will in a direct manner harm the creditors and holders of the currency as the value decreases and also the importers will suffer as the cost of imported goods will be inflated due to the depreciation of the currency. There is always a risk that the new money can be used to invest abroad since the money can be used by the bank to expand the money in emerging markets, commodity based economies and other non-local chances rather than to lend the money to the local trades that have hardships in receiving loans. The deduced government bond yield rates have progressive influence on the underfunding situations of pension funds since the investors face the actual value of their savings declining rather than rising up for some years (Yotov 70). More money inscribe the system lacking a comparable rise in the amount of goods available leading to higher prices thus inflation in the country where more money is generated without increase in the available goods. Presently, central banks tend to move at a slow rate to relax monetary policies when recessions build up due to the fact that they give insufficient weight to output as a policy impartial. Even if the policy target rate may approach zero it is not a major problem to the growth of economy since central banks have a great influential force that grinds up the problem. This policy of quantitative easing affects the country’s economy by influencing the exportation and importation market as well as the influence of the currency depreciation where all this lead to more of economical defects than the benefits it gives to the nation proving that policy only intends to increase the money supply which can no longer be decreased further. Given the advantages and disadvantages of the quantitative easing monetary policy it is clear that the policy is used by the government to increase money supply only when the conventional methods of increasing money supply have become ineffective. Works Cited Committee, Great Britain: Parliament: House of Commons: Treasury. Budget 2013: Ninth Report of Session 2012-13, Report, Together with Formal Minutes, Oral and Written Evidence. london: The Stationery Office, 2013. Klyuev, Vladimir, De Imus, Phil and Srinivasan Krishna. Unconventional Choices for Unconventional Times Credit and Quantitative Easing in Advanced Economies (EPub). united states: International Monetary Fund, 2009. Print. Yotov, Ilian. The Quarters Theory: The Revolutionary New Foreign Currencies Trading Method. New Jersey: John Wiley & Sons, 2009. Read More