The Effect of Quantitative Easing on the Economy

The procedure of quantitative easing is a monetary policy employed by central banks in order to push capital into the economy and in the long term, hopefully help the economy improve. Although quantitative easing may in fact be a ‘quick fix’ and allows for banks to continue lending, it is difficult to establish whether or not it is beneficial to the economy in the long-term. In order to determine its effects, one must first look at other economies that have utilized quantitative easing. Furthermore, it is necessary to evaluate the successes, or lack thereof, during the different phases of quantitative easing that the United States has employed. After looking at these various aspects it will be easier to reach a conclusion regarding the overall effect of the policy.

The first economy to implement the previously unused procedure of quantitative easing was Japan. It was essentially a monetary policy experiment and Japan utilized it to stimulate the country’s economy and, at the beginning of the program in 2001, many people were skeptical as to whether or not it would have a lasting effect on the economy. The influx of capital into the market had the “expected impact of reducing the already low overnight call rate effectively to zero” but it would be hard to determine whether or not the policy would permanently affect the economy in Japan.

After the policy was lifted in 2006, many studies were conducted in regards to the question of whether or not the new monetary policy in Japan would legitimately make any changes. The differences that were made include “a direct effect of increases in current account balances, an impact on the expectations of market participants, increased central bank purchases of long-term Japanese government bonds that would reduce the long-term interest rates, and an encouragement of greater risk tolerance in the Japanese financial system.” Overall, “the real effects of quantitative easing appear to be associated with…some measurable declines in longer-term interest rates” and it also seems that the program tended to aid weaker Japanese banks and encouraged heightened risk-tolerance within the financial system in Japan. However, implementation of quantitative easing could also potentially have had the negative effect of delaying a true structural reform.

While the quantitative easing program could have entirely different effects on the United States economy, it is very important to look into other powerful countries that utilized the same procedures. Very soon after Japan ended its quantitative easing monetary policy in 2006, the United States started its first round, QE1, in November 2008 in wake of the financial crisis. The first round lasted the longest of any round thus far, continuing for 17 months and “by and large after its culmination it was considered a success.” Each month the Fed spent $100 billion purchasing mortgage backed securities, totaling $1.7 trillion over