Summary
Summary advantages and disadvantages of quantitative easing
- Module
- Quantitative easing
- Institution
- PEARSON (PEARSON)
advantages and disadvantages of quantitative easing
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Advantages & Disadvantages of Quantitative EasingAdvantages Disadvantages
Gives central bank an extra tool of Contribute to rising wealth inequality due
monetary policy besides changing IR (Esp to surging house prices and housing rents-
when IR is at its rock bottom) worsens geographical mobility
Increase size of monetary base helps to Increase monetary base might lead to
lower threat of price deflation- without QE, inflationary pressure
fall in real GDP would have been deeper
and the rise in unemployment greater
Lower long term IR keeps business Ultra-low IR can distort allocation of capital
confidence higher and gives commercial + keep alive zombie companies (= company
banking system extra deposits to use for that need bailouts (= when a
lending business/individual/government inject
capital to a failing company to prevent
bankruptcy) in order to operate/ an
indebted company that is able to repay
interest on its debt but repay the principal)
Depreciation of ER helps to improve the Low IR reduces the annual incomes from
international price competitiveness of pension funds making life tougher for those
exports with savings + who rely on their
occupational pension
How QE affects the Macroeconomy:
Wealth - Lower yields (IR) = Higher share & bond prices due to increase demand
Borrowing cost – Lower IR on long-term debts eg. Gov bonds & mortgages (only
when the IR is not fixed)
Lending – increases liquidity of banks= encourage banks to lend more= increase
borrowing and thus spending from consumers and investment by firms
Currency – lower IR= weaker currency/ depreciation= helps export
Evaluations:
Uncertain time lags & impact of QE on the real economy (other policies acting along
with QE)
Bank of England now a major holder of UK government debt
Some economists arguing for ‘Green QE’/ ‘people’s QE’ = using QE to help fund
green infrastructure, education & health/social care
Is the economy now too dependent on cheap money?
UK Context- Pros & Cons of using QE during 2008 Financial Crisis
Pros :
1. Important for the central bank to have additional policy instruments other than
changing interest rates especially if the economy is experiencing a liquidity trap
2. Use of QE likely to have staved off the threat of a deflationary depression post 2008.
Without QE, the fall in real GDP would have been deeper and the rise in
unemployment greater.
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