Quantitative Easing - Decreasing Interest Rates Research Paper

Quantitative Easing - Decreasing Interest Rates - Research Paper Example The practice is entirely different from the usual approach of purchasing and selling government bonds to maintain a targeted market interest rate. It must be emphasized that a central bank uses new electronically created money for the purchase of financial assets in order to implement quantitative easing policy. This practice is helpful for increasing excess bank reserves which in turn may lower yields. The ultimate goal of the quantitative easing policy is to cut down long-term interest rates so as to stimulate economic activities. For this purpose, monetary authorities purchase financial assets of longer maturity and thereby reduce long-term interest rates on the yield curve. In addition, the tool of quantitative easing is very helpful to ensure that inflation rate does not fall below the targeted level. This paper will analyze the pros and cons of quantitative easing and will discuss whether the Fed has a choice of using this tool in a highly recessionary economy. Benefits of Quan titative Easing As Elliott (2009) purports, the unconventional quantitative easing monetary policy may assists banks to keep excess reserves with them and hence to lend largely to businesses and individual borrowers. In turn, businesses will use these additional funds to finance productive activities including infrastructure development and R&D. Similarly, individual borrowers will use this new fund for their day to day activities or investment purposes. This will ensure effective circulation of money throughout the economy. Hence, these increased economic activities will certainly assist the economy to come out of stagnation and stimulate economic growth. Since this monetary tool is helpful to keep the inflation at a moderate level, it assists regulators to prevent the economy from falling into deflationary conditions. According to Kollewe (as cited in the guardian, 2009), US, UK, and Japan are very much interested in quantitative easing policies as a way to stabilize economic grow th. The writer points out that the US was the first country which used quantitative easing as a response to its recessionary conditions. According to International Monetary Fund, the major developed countries that deployed the quantitative easing policy since the beginning of the 21st century were less affected by the 2008 global financial crisis as compared to other industrially developed economies. During the 2008 global financial crisis, it has been identified that the quantitative easing boosted the financial markets by adding liquidity. A weaker currency that amplified export demand is also identified to be one of the major desirable side effects of quantitative easing policy. To a certain extent, the quantitative easing technique has assisted economies to diminish unemployment rate. While analyzing the US economy, it is obvious that this unconventional monetary tool has played a crucial role in the economy in overcoming the dreadful impacts of the 2008 global financial crisis. As per the report of Hermansson (2010), economists hold the view that US’ entire budget deficit would be funded for a fiscal year, if the quantitative easing has been set as high as $1 trillion. In order to take advantages of the quantitative easing policy, the Fed used the returns of previous bond purchases to acquire new long-term financial assets in 2010.