Prepared by: Sayed Hossain, Phd in EconomicsCollin College, Texas.March 28, 2014

Personal website : www.sayedhossain.com

www.sayedhossain.com

Quantitative easing, qualitative easing and inflation

20 Minutes Presentation

Types of monetary policy

1. Traditional monetary policy2. Quantitative easing and qualitative easing.

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Traditional Monetary Policy

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Traditional Monetary Policy

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Traditional Monetary Policy

What is quantitative easing?

Quantitative easing (QE) is an unconventional monetary policy used by central bank.

Under QE, central bank purchase long term bond to reduce long term interest rate.

What is qualitative easing?

Quantitative easing is an expansion of a central bank's balance sheet.

Qualitative easing is a process of Central Bank to add riskier assets to its balance sheet. As a result, average quality of assets decreases.

Importance of qualitative easing

FED purchased riskier assets such as mortgage backed securities that helped to revive stock market in 2009.

Importance of qualitative easing

Qualitative easing adopted in the European Union throughout the early 21st century.

European Central Bank purchased bond issued by troubled countries like Greece and Italy.

As a result, average quality of assets of European Central bank went down but it had positive impact on Eurozone.

Why Quantitative Easing in USA?

As Fed Fund Rate has gone down to Almost Zero Percent but fails to bring expected results, FED has targeted Long Run Rate under QE Program to reduce long run rate to boost spending.

Traditional Monetary Policy VS Quantitative Easing

The targets of both the Traditional Monetary Policy and Quantitative Easing are to increase Money Supply and boost Spending.

Traditional monetary policy targets Fed Fund Rate while QE is targeting Quantity of Money.

The Traditional Monetary Policy targets Short Run Rate while QE is targeting Long Run Rate to enhance Spending.

Traditional monetary policy is generally implemented by purchasing Short Term Bond while QE is implemented by buying Long Term Bond to control Long Term Cost of Borrowing.

What is the possible adverse affect of QE program?

Answer: Inflation (If it is more than 2 percent)

But in reality it did not occur. Rather inflation gone down. So, QE needs to be continued.

Positive impact of QE program.

1. Risk of deflation has been tackled so far. Rate of inflation is close to targeted 2 percent.

2. As the inflation is low, living standard is likely to go up, upon which invention and innovation largely depend.

Positive impact of QE program

3. Rate of unemployment is improving, down to 6.7 percent, will boost spending further.

4. GDP growth is moderate.

5. Stock indices are rising, making households wealthy. Spending is likely to boost.

The End

Thank you