Allison Dolan, Javier Ramos, Alex Ouligian, Bianca Tomkoria

1 March 2011

A monetary policy of central banks that entails buying bonds and other assets in order to inject liquidity to the market.

Process: The central bank electronically gives itself a set amount in its own account.

Buys bonds and other assets from commercial or investment banks

Similar but distinct from QE Buy sovereign debt Stabilize “dysfunctional” market segments

Restore monetary policy transmission mechanisms

3 and 6 month liquidity cycles Liquidity re-absorbed through other ECB operations

Used when interest rates are near zero

When the central bank is willing to risk inflation

When additional liquidity is needed, i.e. to prevent a liquidity trap

Used by the major central banks during the 2007-2010 Financial Crisis

May 2010 – Securities Asset Programme

2007 – US Fed Quantitative Easing

IMF: QE increased the stability of international financial markets during the 2007-2010 Financial Crisis

Restore some confidence in financial sector

ECB balance sheet is more risky in the case of Euro member default

Banks and other institutions don’t circulate the newly acquired cash

Banks invest their cash overseas or in speculative markets

Prolonged low interest rates may lead to financial bubbles in the future

Decreases fiscal agility of ECB in other areas

Quantitative Easing

Quantitative Easing SMPSMP

Possible inflation risks, especially if GDP growth does not keep up with the new issuance of debt

Banks and other institutions don’t circulate the newly acquired cash

Banks invest their cash overseas or in speculative markets

Prolonged low interest rates may lead to financial bubbles in the future

Escaping inflation… Ability to buy cheap imported goods▪ Eurozone might not be in the best position to do this because much of member states’ imports are from other members

When liquidity goes toward creating an asset bubble

Balance sheet has to be seen from a central bank perspective

Preventing future crises and stabilizing markets may involve a more united fiscal policy

Balance sheet has to be seen from a central bank perspective

Preventing future crises and stabilizing markets may involve a more united fiscal policy

German central bank and government are very much opposed to this idea

"What Spain advocates is that if we have a single currency, it's not enough just to have a central bank, a single central bank. It's not enough to have a single monetary policy. We also need to have a common economic policy"

Asset purchase programs have become an important tool for central banks for controlling more complex economies

12 – 18 month window to see inflationary effects

Don’t have much empirical evidence for the effects of these types of programs

▪ Japan in the 90s only strong case

And now, a lesson from South Park…

How things REALLY get decided at the Fed...

Chu, Dian L. From Quantitative Easing to Stagflation? The Market Oracle, 2010. <http://www.marketoracle.co.uk/Article23955.html>. November 02, 2010.

Conway, Edmund. Policy of 'printing’ money is still not yielding results. The Telegraph, 2009. <http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5293310/Policy-of-printing-money-is-still-not-yielding-results.html>. May 07, 2009.

Eurostat Eurozone Annual Inflation. <http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tsieb060>. February 28, 2011.

Inman, Philli. ECB tries to calm markets by promising unlimited liquidity. Guardian, 2010. <http://www.guardian.co.uk/business/2010/dec/02/european-central-bank-bonds-jean-claude-trichet>. December 2, 2010.

Iyer, Raman. Jose Luis Rodriguez Zapatero. 2011. Top News Law. <http://www.topnews.in/law/people/jose-luis-rodriguez-zapatero>. January 31, 2011.

Sharma, Shalini. Angela Merkel. 2009. Top News. <http://topnews.us/category/people/angela-merkel>. January 13, 2009.