Does Quantitative Easing Policy in US Affect Market Liquidity - Research Proposal Example

The effect is due to the contrast it has in increased awareness of potential risk and the cost that are associated to quantitative easing as expressed by policy makers as purchases continued (Krishnamurthy & Vising-Jorgensen, 2011). In the initial program of quantitative easing, officials of Federal Reserves suggested potential risk but the focus they had was mainly on implementation of the program without taking into consideration the costs that were associated with the ongoing purchases. They were mainly concerned with using the policy to support stronger economic recovery (Krishnamurthy & Vissing-Jorgensen, 2011).

The effect that quantitative easing had to the economy is on the stimulation. Through the policy, the federal government is able to auction large quantities of treasuries so that they pay for expansionary fiscal policy. As the treasuries are bought, demand increases keeping yields of the treasury low. This leads to keeping the consumer debts affordable since treasuries are the basis of long term interest rates. This is also similar to corporate bonds as they allow business to expand more cheaply.

To show liquidity channel, analysis can be made on the second program of Fed which was from November 2010 and was concluded in 2011. In the period, there was effect on priced frictions to trading in the market for treasury inflation protected securities and the markets that they were related for inflation swap contracts. To quantify the effects of TIPS purchases on the functions the market and the related market for inflation swaps, there is use of sum of TIPS and inflation swap liquidity premiums (Lessambo, 2013).

The measure is only reliant on the law of one price and provides a good proxy for the priced frictions to trading. The hypothesis formulated for the study is that there are several ways through which quantitative easing has affected