Quantitative Easing in The USA Economy

In an economy that needs money in order to function as much as a factory needs oil, quantitative easing seems to be the key when difficulties arise. As the former chairman of FED B. Bernanke argues "credit can build an economy but the lack of credit can ruin it” hence, after 2001 when the 9/11 terroristic attack changed the way we see international political economy and the 2008 Great Recession changed how we see globalized shocks, money supply was able to help minimize the impact of those two tremendous economic disturbances (2011). This paper is going to focus on the quantitative easing policy on USA and the European Union, the effects of the QE on both of them and a comparison on the impact of it.

Quantitative easing

Quantitative Easing is a method used by central banks in order to increase the supply of money in the economy. This phenomenon occurs by buying securities such as government bonds. This method is functional through the belief that commercial banks will use the amount of money now deposited in their accounts in order to purchase new assets which will lead to a higher demand for stocks and bonds hence an increase in the price of stocks and bonds which will cause a decrease in interest rates and in consequence will help generate more investments (ECB, 2018).

Quantitative easing in USA

At the beginning of the crisis in 2007 the FOMC (Federal Open Market Committee) took some liquidity actions in order to extend the term loans to banks and to lower the federal fund rate by 50 basis points which was followed by a sum of 325 basis points decrease (FED,2007). In 2008 the committee increased the money supply further by lowering interest rates and then decreased its target to the lower bound where it still remains (FED, 2008).

In addition, in 2008 and early 2009 the FED provided liquidation for the American commercial banks which in an indirect way would increase the supply of money through the process of borrowing (FED,2009). In 2010 and 2011 the economy was slowly recuperating however a quantitative easing process remained in place and in 2012 due to the above mentioned monetary policy the GDP was steadily growing given that the target for the Federal Fund Rate was fixed at 0%-0.25%(FED, 2011). Chairman B. Bernanke supported that in order to reach the two most important objectives, those of full employment and price stability, an expansionary monetary policy was necessary(Fed,2012). 2013 was B. Bernanke’s last year as a FED chairman and QE remained in place in order for the country to fully recuperate (FED, 2013).

In 2014 the new chair Janet Yellen continued the FOMC's policy of asset purchases and forward guidance in order to achieve the dual objectives of the FED (FED, 2014). In 2015-2016 even though the country was no longer facing the effects of a recession it maintained the above-mentioned monetary policies in order to get inflation at 2% and lower the unemployment level (FED,2016). In 2017 the FOMC increased the target range for the Federal Fund Rate to 0.5%-0.75% and expects to increase the target gradually and until a "neutral federal fund rate is achieved” (FED, 2017). The quantitative easing program in EU started in 2014 with the “Asset-Backed Securities and Covered Bonds Purchase Programs” provided by the ECB (Claeys et al., 2015).

Furthermore in 2015 the QE program was expanded with the implementation of “Public Sector Purchase Program” which focused mostly on the purchase of sovereign bonds or in other words Public Bonds and securities from EU institutions (Claeys et al., 2015). The average increase of the money supply in the European economy was around 60 billion eurosper month, 10 billion from the first program and 50 billion from the second one. In 2016 the ECB included a new policy regarding QE, which incorporated corporate bonds to the already existing QE, named “corporate sector purchase program” (Huttl and Pichler, 2017).

According to the ECB the QE program helped the union to boost economic performance and for inflation to be maintained at around 2% (ECB,2018).In 2017 the abovementioned policies continued to take place and the final amount of QE amounted to €1,784 billion (Huttland Pichler, 2017). The governing council of the ECB will maintain the interest rates at approximately 0% for 2018 which means that QE will be supported until favorable liquidity conditions are achieved (ECB, 2017).