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Quantitative Easing (Cons (– The first round in 2009 had effects on GDP…
Quantitative Easing
Overview
March 2009 MPC undertook a series of asset purchases to give the economy a boost (along with lowering bank rate to 0.5%). It’s aim was to inject money directly into the economy to boost spending as banks are often reluctant to lend in a crisis.
How It works:
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-These investors don’t like to hold money because it has a low return so they will use it to purchase other assets (eg corporate bonds)
-This lowers long term borrowing costs and encourages new bonds and equities which in turn should stimulate spending.
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Pros
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– MPC can set the target of asses purchases so its unlikely it can be used to inflate government debt away
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Cons
– The first round in 2009 had effects on GDP but other rounds haven’t (also in 2009 growth was very weak so possibly why it worked)
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– Purchasing corporate bonds distorts competition as it lowers borrowing costs for those companies but not for others
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– Low interest rates can cause inefficient investment in capital (23% of capital is captured by ‘zombie firms’)
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– Government could put pressure on MPC to inflate their debt away (again not happened yet but could do)