Back in January the Eurozone announced its plan to use quantitative easing as a way to ultimately add money to the European financial system. The plan is to use the policy for about 19 months - between March 2015 and September 2016. The plan is considered the Eurozone's best effort to facilitate a higher velocity of money by giving banks more lending capacity, stimulating the economy and warding off deflation. So far, the plan has been successful in its first month spending goals for quantitative easing (most recent article talking about the first month of the plan).
Given the troubled state of the Eurozone economy in the face of deflation and recession, I think this is a good idea and it could work. If it helps, there are comparisons online regarding this plan in Europe to previous quantitative easing policies used in Japan, Britain, and the US. No one knows if it will work (obviously), but it should at least bring confidence to markets.
Quantitative easing... A good or bad idea for the Eurozone in its current state? Other thoughts?
Instituting QE has been a pretty popular tool to use to boost economic activity since the recession. Quantitative easing seemed to have done its job here in the US. However there was lots of talk about QE in the European Union before the ECB actually instituted it, so it may not have the same effects on consumers. Their confidence in the economy may not return as much as the ECB is hoping for. So it will be interesting to follow how well QE works for the EU.
ReplyDeleteI am still a little uneasy about countries implementing QE policy. When these programs end and the central bank wants to sell back these high risk assets how do they know they will break even or gain profit, like Bernanke mentioned?
ReplyDeleteHaving said that when you look at nations like Japan, the UK, and the US it seems as if QE policy has been very effective. As many problems continue in the EU and their economic growth rate remained stagnate (serious concern of deflation), in my opinion they had to try something to stimulate the economy. So I support their attempts of using this less conventional monetary tool to try to spark the growth rate to over 1%. However, I am interested in seeing if this program will prove to be as successful as it has been in other parts of the world.
I'm also confused about how central banks will break even after the program ends. This article talks about this problem in U.S. after the Fed ended QE.
ReplyDeletehttp://www.theguardian.com/business/2014/oct/29/fed-quietly-ends-stimulus-hard-work
"The Fed is not filling up the financial hole left by its stimulus. It has only stopped digging itself deeper"
"What the Fed isn’t saying is how it plans to get rid of the enormous number of bonds it has bought."
I did some more search to get more updated info but the latest articles seem to be around Nov 2014. Would love to keep track on this.
Given the state that Europe's economy has been in, quantitative easing is seemingly the only effective strategy currently available. When short-term interest rates fall to such low levels conventional monetary doesn't work. Thus, central banks need to start accumulating short and long-term financial instruments to inject money into the economy, and lower rates further out on the yield curve.
ReplyDeleteI agree with Alex Blough. The Eurozone does have very low short-term interest rates. If the rates are zero or very close to zero and savings are high (liquidity trap), then monetary policies should theoretically be ineffective according to Keynesian models. Even if QE is working in the extreme short run, the EU will definitely have to find long-term investments to ensure a sustainable growth. Curious to see how effective the QE program will be over the next few months.
ReplyDeleteI think that QE may be a good short-term action the ECB can take to stimulate the economy as well as increase confidence in their consumers. However, I agree with Alex and Veeral that this solution is just a quick fix and, it will not permanently solve the problem. Although, the QE has many benefits there are some risks involved in this plan, particularly Germany and Greece will bare some of these. Here is an article discussing how the QE plan that the ECB initiated has received some disapproval from both Germany and Greece governmental officials.
ReplyDeletehttp://www.newsweek.com/germany-and-greece-losers-ecbs-quantitative-easing-plan-313740
I also agree with Alex. Quantitative easing is the best policy for the ECB to implement in the Eurozone since the interest rates are very low in the area. However, the policy might only be effective in the short run, but it can be hard to maintain that effectiveness in the long run.
ReplyDelete