Research Paper on "Is Quantitative Easing a Suitable Policy?"

Research Paper 7 pages (2223 words) Sources: 7

[EXCERPT] . . . .

Both controllable and uncontrollable factors thus suggest that the projected negative impacts of quantitative easing are unlikely to be as severe as naysayers feared, even though the recovery sustained was not as robust as its most ardent proponents would have liked.

The effects of quantitative easing globally

The U.S. is not the only country pursuing a policy of quantitative easing. China's own economy is quite sluggish at the moment, precipitating the Chinese central bank's institution of a unique form of quantitative easing particular to China. In the U.S., as previously noted, the policy is focused on buying back securities and assets to free up the money supply and to stimulate economic expansion. China's form of "qualitative easing," is when " the People's Bank of China [PBOC] adds riskier assets to its balance sheet -- such as by relending to the agriculture sector and small businesses and offering cheap loans for low-return infrastructure projects -- while maintaining a normal pace of balance-sheet expansion" (Hong). These high-risk, cheap loans are designed to flood more funds into the economy. The program is similar to the one used in the U.S. In the sense that it is highly targeted, unlike traditional monetary policy. It is specifically designed to rehabilitate targeted sectors in the economy, versus creating a more general economic stimulus. However, China's focus is on lending vs. buying back securities. A "significant implication of Beijing's QE is that if the policy transmission in the broader economy turns out to be ineffective, the PBOC may resort to cutting benchmark interest rates directly, arguably the most authentic and powerful form of monetary policy easing" (Hong).

In general, the end of the U.S. policy of quantitative easing is assumed to have a largely beneficial effect for developing world economies and the world economy as a whole. "By weakening the dollar and encouraging speculation, it helped fire up the price of oil and other commodities. With global investors' most influential source of QE gone, that stimulus has been removed. The Brent crude oil price is down by about 20% from its over-$100 highs of late June and the Thomson Reuters CRB commodity index by 13% over the same period" (Campbell). A decline in the cost of fuel will function as a tax break to developing economies as well as U.S. consumers, given the vital role plays in fueling economic expansion. It will also increase the availability of food and other vital indicators. "The UN Food and Agriculture Organization reports global food prices fell by 2.6% in September. They're down by 6% in a year, taking them to their lowest since 2010. This will help keep inflation and interest rates down in emerging economies" (Campbell). Even more powerful developing world economies like India, these price cuts will be significant. The EU and troubled areas of the developed world will also benefit from declines in the price of fuel: the more disposable income consumers have not devoted to fuel and food will fuel other sectors of the economy.

Conclusion

Quantitative easing was a necessary albeit imperfect solution to the difficulties the U.S. economy was experiencing in the wake of the 2008 global recession. The Fed was slow to discontinue the program because of the sluggish pace of the recovery. Still, the policy allowed the U.S. To avoid catastrophic deflation or stagflation. Other economies have made use of the policy in different forms as a source of economic stimulus: although the time for the program to end has come in the U.S., that does not discount the value of the program and its utility during times of extreme economic turmoil when less aggressive monetary policies are not effective.

Works Cited

Campbell, Ian. "End of U.S. QE is actually good for world economy." Reuters. 4 Nov 2014.

Web. 30 Dec 2014.

Coy, Peter. "The Hawaiian tropic effect: Why the Fed's policy of quantitative easing isn't over."

Bloomberg 29 Oct 2014. Web. 30 Dec 2014.

Dolan. Ed. "What quantitative easing did not do." Economonitor. 4 Nov 2014. Web.

30 Dec 2014.

"The Economist explains quantitative easing." The Economist. 14 Jan 2013. Web. 30 Dec 2014.

"Free exchange: Early retirement." The Economist. Nov 2014. Web. 30 Dec 2014.

Hong, Shen. "How China is trying to boost its economy." The Wall Street Journal.… READ MORE

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