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Chapter 9 - DD209 - Qualitive & Quantitive easing (Quantitive easing,…
Chapter 9 - DD209 - Qualitive & Quantitive easing
Qualitive easing
Central banks exchange high quality, liquid assets for less liquid assets that commercial banks were previously holding
The aim is to improve inter-bank lending
May push the IS curve to the right
Stimulate a lower market rate (r)
Quantitive easing
The control of money in a system
Does not restrict, but increase the amount of money
Central bank buys gilts/bonds from commercial banks and/or governments an/or other non-bank holders
This creates cash for commercial banks and governernments
Those who sold their gilts/bonds now have cash to buy other asset classes such as corporate bonds.
Corporate bonds increase in popularity in purchases from those who sold to central bank
Corporate bonds an equity prices rise and then yields fall
Cost to firms of financing new investment falls
Due to a reduction in long-term interest rates
Gilt prices rise and yield falls
Low yield percentage = low popularity
Central bank now have liquid assets available to lend to firms and/or households
When buying from non-banks, the central bank credits the bank account of the non-bank
The money supply has now increased
Helps push up the IS curve
The transmmission mechanism of Quantitive easing
Expectations
Many spending decisions are based on the confidence that the conditions will improve
Asset purchases will boost confidence & improve spending
Policy signalling
Publicing the purchases of assets shows to the agents what policymakers are doing to improve conditions
Agents may expect a fall in the real interest rates and easing the zero lower bound problem.
Portfolio rebalancing
BoE buys assets from sellers = Sellers having more liquid cash
The seller will buy more assets
Asset prices will increase and a fall in yields on those assets once the sellers have bought them.
Increase in asset prices create wealth shocks
Policymaker may be able to influennce medium and long-term interest rates that Policy can't reach
Produces a reduction in the spread between policy and market rates
Market liquidity
The ese to which assets can be traded
When liquidity is low, a big buyer of assets steps in and this makes assets more liquid
If other agents are influenced by the spending by BoE by buying assets themselves, this crates a secondary boost in liquidity
Money and bank lending
When BoE buys assets from commercial banks, comercial bank liquidity has increased
Commmercial banks may be ecouraged to lend
Purchases of assets from non-banks have immediate affects
